AVON PENSION FUND

FUNDING STRATEGY STATEMENT

AVON PENSION FUND

16 Apr i l 2021

BATH AND NORTH EAST SOMERSET COUNCIL

A V O N P E N S I O N F U N D F U N D I N G S T R A T E G Y S T A T E M E N T

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IEXECUTIVE SUMMARY

Ensuring that the Avon Pension Fund (the “Fund”) has sufficient assets to meet its pension

liabilities in the long-term is the fiduciary responsibility of the Administering Authority (BATH AND

NORTH EAST SOMERSET COUNCIL). The Funding Strategy adopted by the Avon Pension Fund

will therefore be critical in achieving this.

The purpose of this Funding Strategy Statement (“FSS”) is to set out a clear and transparent

funding strategy that will identify how each Fund employer’s pension liabilities are to be met going

forward.

The details contained in this Funding Strategy Statement will have a financial and operational impact on all participating employers in the Avon Pension Fund.

It is imperative therefore that each existing or potential employer is aware of the details contained in this statement.

Given this, and in accordance with governing legislation, all interested parties connected with the

Avon Pension Fund have been consulted and given opportunity to comment prior to this Funding

Strategy Statement being finalised and adopted. This statement takes into consideration all

comments and feedback received.

M EETING THE FUND’S SOLVENCY OBJ ECTIVE

The Administering Authority’s long-term objective is for the Fund to achieve a 100%

solvency level over a reasonable time period. Contributions are set in relation to this

objective which means that once 100% solvency is achieved, if assumptions are borne

out in practice, there would be sufficient assets to pay all benefits earned up to the

valuation date as they fall due. However, because financial and market

conditions/outlook change between valuations, the assumptions used at one valuation

may need to be amended at the next to meet the primary objectives. This in turn means

that contributions will be subject to change from one valuation to another. This objective

is considered on an employer specific level when setting individual contribution rates so

each employer has the same fundamental objective in relation to their liabilities.

The general principle adopted by the Fund is that the assumptions used, taken as a whole, will be

chosen sufficiently prudently for this objective to be reasonably achieved in the long term at each

valuation.

The funding strategy set out in this document has been developed alongside the Fund’s

investment strategy on an integrated basis taking into account the overall financial and

demographic risks inherent in the Fund to meet the objective for all employers over different

periods. The funding strategy includes appropriate margins to allow for the possibility of adverse

events (e.g. material reduction in investment returns, economic downturn and higher inflation

outlook) leading to a worsening of the funding position which would normally lead to volatility of


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contribution rates at future valuations if these margins were not included. This prudence is required

by the Regulations and guidance issued by professional bodies and Government agencies to

assist the Fund in meeting its primary solvency objective. The level of prudence has been

quantified by the Actuary to provide protection against future adverse experience in the long term.

Individual employer results will also have regard to their covenant strength and the investment

strategy applied to the asset shares of those employers.

LO NG TERM CO ST EFFICI ENCY

Employer contributions are also set in order to achieve long-term cost efficiency.

Long-term cost-efficiency requires that any funding plan must provide equity between

different generations of taxpayers. This means that the contributions must not be set

at a level that is likely to give rise to additional costs in the future which fall on later

generations of taxpayers or put too high a burden on current taxpayers. The funding parameters

and assumptions e.g. deficit recovery period must have regard to this requirement which means a

level of prudence is needed. Furthermore, the FSS must have regard to the desirability of

maintaining as nearly constant a primary rate of contribution as possible.

When formulating the funding strategy, the Administering Authority has taken into account these

key objectives and also considered the implications of the requirements under Section 13(4)(c) of

the Public Service Pensions Act 2013. As part of these requirements the Government Actuary’s

Department (GAD) must, following an actuarial valuation, report on whether the rate of employer

contributions to the Fund is set at an appropriate level to ensure the “solvency” of the pension fund

and “long term cost efficiency" of the Scheme so far as it relates to the Fund.

DEFI CIT RECOVERY PLAN AND CONTRIBUTIONS

As the solvency level of the Fund is 94% at the valuation date i.e. the assets of the Fund

are less than the liabilities, a deficit recovery plan needs to be implemented such that

additional contributions are paid into the Fund to meet the shortfall.

Deficit contributions paid to the Fund by each employer will be expressed as cash amounts (flat or

increasing year on year) and it is the Fund’s objective that any funding deficit is eliminated as

quickly as the participating employers can reasonably afford given other competing cost pressures.

This may result in some flexibility in recovery periods by employer which would be at the sole

discretion of the Administering Authority. The recovery periods will be set by the Fund, although

employers will be free to select any shorter deficit recovery period if they wish. Employers may

also elect to make prepayments of contributions which could result in a cash saving over the

valuation certificate period.

The medium term objective is to recover any total Fund deficit over an average period of 12 years

which in the long term provides equity between different generations of taxpayers whilst ensuring

the deficit payments are eliminating a sufficient proportion of the capital element of the deficit,

thereby reducing the interest cost. This will be periodically reviewed depending on the maturity

profile of the Scheme. Subject to affordability considerations and individual circumstances, where

a deficit exists and depending on the level of the deficit, a guiding principle will be to maintain the

total contributions at the prescribed monetary levels from the preceding valuation (allowing for any

indexation in these monetary payments over the recovery period). For those employers who are

recovering deficit over a shorter period than 12 years, then their recovery period will be expected to

remain the same if their covenant is of sufficient strength to support the liabilities in the long term.


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However, where an employer is expected to exit the Fund, then in normal circumstances, the

deficit would be recovered over the remaining period to exit. Full details are set out in this FSS.

The average recovery period for the Fund as a whole is 13 years at this valuation which is 3 years

shorter than the average recovery period from the previous valuation. Subject to affordability and

other considerations individual employer recovery periods would also be expected to reduce at this

valuation.

Where there is a material increase in contributions required at this valuation, in certain

circumstances the employer will be able to ’phase in’ contributions over a period of 3 years in a

pattern agreed with the Administering Authority and depending on the affordability of contributions

as assessed in the covenant review of an employer. Equally employers will be able to align their

contributions changes with their financial year if this does not end on 31 March.

The Government has confirmed that a remedy is required for the LGPS in relation to the McCloud

judgment. Therefore, the Fund has considered its policy in relation to costs that could emerge from

the McCloud judgment, in line with the guidance from the Scheme Advisory Board in conjunction

with the Actuary. Whilst the remedy is not known and may not be known for some time, for the

purpose of this valuation, when considering the appropriate contribution provision, we have

assumed that the judgment would have the effect of removing the current age criteria applied to

the underpin implemented in 2014 for the LGPS. This underpin therefore would apply to all active

members as at 1 April 2012. The relevant estimated costs have been quantified and notified to

employers on this basis but also highlighting that the final costs may be significantly different.

Employers will be able to choose to include these estimated costs over 2020/23 in their certified

contributions. Alternatively, they will need to make allowance within their budgets and note that

backdated contributions could be payable if the remedy is known before the next valuation. The

majority of employers have made provisions directly in their contributions.

ACTUARI AL ASSUM PTIONS

The actuarial assumptions used for assessing the funding position of the Fund and the

individual employers, the “Primary” contribution rate, and any contribution variations

due to underlying surpluses or deficits (i.e. the “Secondary” rate) are set out in

Appendix A to this FSS.

The discount rate in excess of CPI inflation (the “real discount rate”) has been derived from the

expected return on the Fund’s assets based on the long term strategy set out in its Investment

Strategy Statement (ISS). When assessing the appropriate prudent discount rate, consideration

has been given to the level of expected asset returns in excess of CPI inflation (i.e. the rate at

which the benefits in the LGPS generally increase each year).

The assumption for the long term expected future real returns has fallen since the last valuation.

This is principally due to a combination of expectations: the returns on the Fund’s assets and the

level of inflation in the long term. Also, the Fund has implemented a number of risk management

strategies since the last valuation meaning that the expected volatility of returns has fallen i.e.

provides more certainty to outcomes. This is also taken into account by the Actuary when

proposing the assumptions and at this valuation means that the level of prudence has been

reduced. The assumption has therefore been adjusted so that in the Actuary’s opinion, when


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allowing for the resultant employer contributions emerging from the valuation, the Fund can

reasonably be expected to meet the Solvency and Long Term Cost Efficiency objectives.

The Fund has improved its “lower risk investment strategy” (previously described as the “corporate

bond” strategy) that it offers to employers so that it is better matched to the risk profile of the

employer’s liabilities. Existing “corporate bond” employers will be transitioned into the lower risk

investment strategy with effect from 1 April 2019. This strategy exhibits a lower investment risk

than the current whole fund strategy. If an employer is deemed to have a weaker covenant than

others in the Fund, is planning to exit the Fund or would like to target a lower risk strategy, the

Administering Authority has the discretion to move that employer (typically following discussions

with the employer) into this investment strategy to protect the Fund as a whole. The current overall

Fund investment strategy (as set out in the Investment Strategy Statement) will be known as the

“higher risk investment strategy”.

Taking into account the above, the Fund Actuary is proposing for the higher risk strategy that the

long term real return over CPI inflation assumptions for determining the past service liabilities

should be 1.75% per annum and 2.25% per annum for determining the future service (“Primary

Rate”) contribution rate. This compares to 2.2% per annum and 2.75% per annum respectively at

the last valuation.

The lower risk investment strategy is predominately linked to corporate bond investment assets

and is expected to reduce funding volatility for employers within it (as a minimum this will be

reviewed following each actuarial valuation). In these circumstances, the discount rate is directly

linked to yields on corporate bonds within the lower risk investment strategy. In addition, the

strategy has exposure to the Liability Driven Investment (“LDI”) portfolio to provide protection

against changes in market inflation expectations. The discount rate assumption used for

employers’ liabilities who fall into this category is linked directly to the lower risk strategy assets.

The return above inflation used at the valuation date was 0.2% per annum i.e. a discount rate of

2.6% per annum.

Within the next valuation cycle, the Fund will consider the merits of implementing a medium risk

investment strategy. This strategy will have a lower level of growth assets compared with the

higher risk whole Fund strategy.

The demographic assumptions are based on the Fund Actuary’s bespoke analysis for the Fund

taking into account the experience of the wider LGPS where relevant.

EMPLOYER ASSET SHARES

The Fund is a multi-employer pension scheme that is not formally unitised and so

individual employer asset shares are calculated at each actuarial valuation. This

means it is necessary to make some approximations in the timing of cashflows and

allocation of investment returns (in line with the appropriate strategy) when deriving

the employer asset share.

At each review, cashflows into and out of the Fund relating to each employer, any movement of

members between employers within the Fund, along with investment return earned on the asset

share, are allowed for when calculating asset shares at each valuation. In addition, the asset

shares maybe restated for changes in data or other policies.


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Other adjustments are also made on account of the funding positions of orphan bodies which fall to

be met by all other active employers in the Fund.

FUND PO LICI ES

In addition to the information/approaches required by overarching guidance and

Regulation, this statement also summarises the Fund’s approach and policies in a

number of key areas:

1. Covenant assessment and monitoring

An employer’s financial covenant underpins its legal obligation and crucially the ability to meet its

financial responsibilities to the Fund now and in the future. The strength of covenant to the Fund

effectively underwrites the risks to which the Fund is exposed, including underfunding, longevity,

investment and market forces.

The strength of employer covenant can be subject to substantial variation over relatively short

periods of time and, as such, regular monitoring and assessment is vital to the overall risk

management and governance of the Fund. The employers’ covenants will be assessed and

monitored objectively in a proportionate manner and their ability to meet their obligations in the

short and long term will be considered when determining an individual employer’s funding strategy.

The Fund will continue to monitor changes in covenant in conjunction with the funding position over

the inter-valuation period which will enable the Fund to anticipate and pre-empt any material issues

arising and thus adopt a proactive approach in partnership with the employer. More details are

provided in Appendix H in this statement.

2. Admitting employers to the Fund

Various types of employers are permitted to join the LGPS under certain circumstances, and the

conditions upon which their entry to the Fund is based and the approach taken is set out in

Appendix B. Examples of new employers include:

− Mandatory Scheme Employers - for example new academies (see later section)

− Designated bodies - those that are permitted to join if they pass a resolution

− Admission bodies - usually arising as a result of an outsourcing or an entity that provides

some form of public service and their funding primarily derives from local or central

government.

The key objective for the Fund is to only admit employers where the risk to the Fund is mitigated as

far as possible. The different employers pose different risks to the Fund and the risk management

policy for existing and new employers applied is set out in Appendix G.

Certain employers may be required to provide a guarantee or alternative security before entry will

be allowed, in accordance with the Regulations and Fund policies.

3. New academy conversions and multi-academy trusts

Current Fund policy regarding the treatment of schools when converting to academy status is for

the new academy to inherit the school’s share of the historic local authority deficit prior to its

conversion. This deficit is calculated as the capitalised deficit funding contributions (based on the


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local authority deficit recovery period) the school would have made to the Fund had it not

converted to academy status, subject to a minimum asset share of nil.

In cases where numerous academies which participate in the Fund are in the same Multi-Academy

Trust, the Fund is willing to allow a combined funding position and average contribution

requirements to apply. Notwithstanding this, the Fund will continue to track the constituent

academies separately on an approximate basis, in the interests of transparency and clarity around

entry and exit of individual academies to the Trust in future.

The full policy is shown in Appendix F.

4. Termination policy for employers exiting the Fund

When an employer ceases to participate within the Fund, it becomes an exiting employer under the

Regulations. The Fund is then required to obtain an actuarial valuation of that employer’s

liabilities in respect of the benefits of the exiting employer’s current and former employees along

with a termination contribution certificate.

The policy for employers who do not have a guarantor participating in the Fund or only

have a guarantee of last resort:

Where there is no guarantor who would subsume the liabilities of the exiting employer, the Fund’s

policy is that a discount rate linked to investment returns on the lower risk investment strategy (with

appropriate adjustment for expenses plus reinvestment and default risks) and a more prudent

longevity assumption is used for assessing liabilities on termination. Any exit payments due should

be paid immediately although instalment plans will be considered by the Administering Authority on

a case by case basis. Any exit credits (surplus assets over liabilities) will be paid from the Fund to

the exiting employer within 6 months of completion of the cessation assessment by the Actuary.

The policy for employers who have a guarantor participating in the Fund:

Where there is a guarantor who would subsume the assets and liabilities of the outgoing

employer, the default policy is that any deficit or surplus would be subsumed into the guarantor and

taken into account at the following valuation. In some instances an exit debt may be payable by an

outgoing employer before the assets and liabilities are subsumed by the guarantor. In the case of a

service which has been outsourced, this will be determined by the commercial contract and

arrangements which exist between the Guarantor and the outgoing employer. Where the outgoing

employer is not responsible for an exit debt, no exit credit would be payable to the outgoing

employer if a surplus of assets over liabilities exists on termination of an admission agreement.

In line with the amending Regulations (The Local Government Pension Scheme (Amendment)

Regulations 2020) the parties will need to make representations to the Administering Authority if

they believe an Exit Credit should be paid outside the policy set out above, or if they dispute the

determination of the Administering Authority. The Administering Authority will provide details of the

information required to make their determination for each case when the need arises. Further

details are set out within the Termination Policy in Appendix C.

http://www.legislation.gov.uk/uksi/2020/179/introduction/made



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The Administering Authority can modify this approach on a case by case basis if circumstances

warrant it and the parties make representations. For example if the parties make representations it

may be appropriate to adjust any exit payment or exit credit to take into account any risk sharing

arrangements which exist between the exiting employer and the outsourcing scheme employer.

The terms of the commercial contract will be key in determining the outcome of conflicting

representations. Consequently the Fund has always emphasised the need for the contract to be

clear on the way in which pensions are to be treated. The Fund would prefer not to be put in the

position of having to adjudicate on the destination of an exit credit where there is either no

reference to pensions in the contract or the terms of the contract are not sufficiently clear.

The policy for repayment of exit debts:

The default position for exit payments is that they are paid in full at the point of exit (adjusted for

interest where appropriate). At the discretion of the administering authority, instalment plans over

an agreed period or a Deferred Debt Agreement may be entered into. If an employer requests that

an exit debt payment is recovered over a fixed period of time or that they wish to enter into a

Deferred Debt Agreement with the Fund, they must make a request in writing covering the reasons

for such a request. Any deviation from this default position will be based on the Administering

Authority’s assessment of whether the full exit debt is affordable and whether it is in the interests of

the Fund (and ultimately therefore the taxpayers) to adopt either of the approaches. In making this

assessment the Administering Authority will consider the covenant of the employer and also

whether any security is required and available to back the arrangements. For clarity the Fund

expects exit payments to be paid in full at the point of exit in all but exceptional cases. Further

details are set out with in Appendix C.

5. Insurance arrangements

The Fund has implemented an internal captive insurance arrangement in order to pool the risks

associated with ill health retirement costs. The captive has been designed for employers whose

financial position could be materially affected by the ill health retirement of one of their members.

The captive arrangement has been considered when setting the employer contribution rates for the

eligible employers. More details are provided in Appendix I.


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CONTENTS

Executive Summary ....................................................................................................................... i

Introduction ................................................................................................................................... 9

Purpose of FSS in policy terms ................................................................................................. 11

Aims and purpose of the Fund .................................................................................................. 12

Responsibilities of the key parties ............................................................................................ 13

Solvency funding target ............................................................................................................. 15

Link to investment policy and the Investment strategy statement (ISS) ................................. 21

Identification of risks and counter-measures ........................................................................... 24

Monitoring and review ................................................................................................................ 27

APPENDICES

A - ACTUARIAL METHOD AND ASSUMPTIONS

B - ADMISSION POLICY

C - TERMINATION POLICY, FLEXIBILITY FOR EXIT PAYMENTS AND DEFERRED DEBT

AGREEMENTS

D – REVIEW OF EMPLOYER CONTRIBUTIONS BETWEEN VALUATIONS

E - EMPLOYERS MOVING BETWEEN INVESTMENT STRATEGIES

F - ACADEMIES / MULTI-ACADEMY TRUST POLICY

G - RISK MANAGEMENT POLICY FOR NON-MANDATORY BODIES

H - COVENANT ASSESMENT AND MONITORING POLICY

I - INSURANCE ARRANGEMENTS

J - GLOSSARY OF TERMS


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1INTRODUCTION

The Local Government Pension Scheme Regulations 2013 (“the 2013 Regulations”), the Local

Government Pension Scheme (Transitional Provisions, Savings and Amendment) Regulations

2014 (“the 2014 Transitional Regulations”) and the Local Government Pension Scheme

(Management and Investment of Funds) Regulations 2016 (all as amended) (collectively: “the

Regulations”) provide the statutory framework from which the Administering Authority is required to

prepare a Funding Strategy Statement (FSS). The key requirements for preparing the FSS can be

summarised as follows:

• After consultation with all relevant interested parties involved with the Avon Pension Fund the

Administering Authority will prepare and publish their Funding Strategy;

• In preparing the FSS, the Administering Authority must have regard to:

− the guidance issued by CIPFA for this purpose; and

− the Investment Strategy Statement (ISS) for the Scheme published under Regulation 7 of

the Local Government Pension Scheme (Management and Investment of Funds)

Regulations 2016 (as amended);

• The FSS must be revised and published whenever there is a material change in either the

policy set out in the FSS or the ISS.

BENEFI TS

The benefits provided by the Avon Pension Fund are specified in the governing legislation

contained in the Regulations referred to above. Benefits payable under the Avon Pension Fund

are guaranteed by statute and thereby the pensions promise is secure for members. The FSS

addresses the issue of managing the need to fund those benefits over the long term, whilst at the

same time facilitating scrutiny and accountability through improved transparency and disclosure.

The Fund is a defined benefit arrangement with principally final salary related benefits from

contributing members up to 1 April 2014 and Career Averaged Revalued Earnings (“CARE”)

benefits earned thereafter. There is also a “50:50 Scheme Option”, where members can elect to

accrue 50% of the full scheme benefits in relation to the member only and pay 50% of the normal

member contribution.

EMPLOYER CO NTRIBUTIONS

The required levels of employee contributions are specified in the Regulations. Employer

contributions are determined in accordance with the Regulations (which require that an actuarial

valuation is completed every three years by the actuary, including a rates and adjustments

certificate specifying the “primary” and “secondary” rate of the employer’s contribution).

PRIMARY RATE

The “Primary rate” for an employer is the contribution rate required to meet the cost of the future

accrual of benefits including ancillary death in service and ill health benefits together with

administration costs. It is expressed as a percentage of pensionable pay, ignoring any past service

surplus or deficit, but allowing for any employer-specific circumstances, such as its membership

profile, the funding strategy adopted for that employer, the actuarial method used and/or the

employer’s covenant.


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The Primary rate for the whole fund is the weighted average (by payroll) of the individual

employers’ Primary rates.

SECONDARY RATE

The “Secondary rate” is an adjustment to the Primary rate to reflect any past service deficit or

surplus, to arrive at the rate each employer is required to pay. The Secondary rate may be

expressed as a percentage adjustment to the Primary rate, and/or a cash adjustment in each of the

three years beginning 1 April in the year following that in which the valuation date falls.

The Secondary rate is specified in the rates and adjustments certificate.

For any employer, the rate they are actually required to pay is the sum of the Primary and

Secondary rates.

Secondary rates for the whole fund in each of the three years shall also be disclosed. These will

be calculated as the weighted average based on the whole fund payroll in respect of percentage

adjustments and as a total amount in respect of cash adjustments.


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2PURPOSE OF FSS IN POLICY TERMS

Funding is the making of advance provision to meet the cost of accruing benefit promises.

Decisions taken regarding the approach to funding will therefore determine the rate or pace at

which this advance provision is made. Although the Regulations specify the fundamental principles

on which funding contributions should be assessed, implementation of the funding strategy is the

responsibility of the Administering Authority, acting on the professional advice provided by the

actuary.

The Administering Authority’s long-term objective is for the Fund to achieve a 100% solvency level

over a reasonable time period and then maintain sufficient assets in order for it to pay all benefits

arising as they fall due.

The purpose of this Funding Strategy Statement is therefore:

• to establish a clear and transparent fund-specific strategy which will identify how employers’

pension liabilities are best met going forward by taking a prudent longer-term view of funding

those liabilities;

• to establish contributions at a level to “secure the solvency of the pension fund” and the “long

term cost efficiency”,

• to have regard to the desirability of maintaining as nearly constant a primary rate of contribution

as possible.

The intention is for this strategy to be both cohesive and comprehensive for the Fund as a whole,

recognising that there will be conflicting objectives which need to be balanced and reconciled.

Whilst the position of individual employers must be reflected in the statement, it must remain a

single strategy for the Administering Authority to implement and maintain.


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3AIMS AND PURPOSE OF THE FUND

THE AIM S OF THE FUND ARE TO:

• manage employers’ liabilities effectively and ensure that sufficient resources are available to

meet all liabilities as they fall due

• enable employer contribution rates to be kept at a reasonable and affordable cost to the

taxpayers, mandatory, resolution and admitted bodies, while achieving and maintaining fund

solvency and long term cost efficiency, which should be assessed in light of the profile of the

Fund now and in the future due to sector changes

• maximise the returns from investments within reasonable risk parameters taking into account

the above aims.

THE PURPOSE OF THE FUND I S TO:

• receive monies in respect of contributions, transfer values and investment income, and

• pay out monies in respect of scheme benefits, transfer values, exit credits, costs, charges and

expenses as defined in the Regulations.


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4RESPONSIBILITIES OF THE KEY PARTIES

The efficient and effective management of the pension fund can only be achieved if all parties

exercise their statutory duties and responsibilities conscientiously and diligently. The key parties

for the purposes of the FSS are the Administering Authority (in particular the Avon Pension Fund

Committee), the individual employers and the Fund Actuary and details of their roles are set out

below. Other parties required to play their part in the fund management process are bankers,

custodians, investment managers, auditors and legal, investment and governance advisors, along

with the Local Pensions Board created under the Public Service Pensions Act 2013.

KEY PARTI ES TO THE FSS

The Administering Authority should:

• operate the pension fund

• collect employer and employee contributions, investment income and other amounts due to the

pension fund as stipulated in the Regulations

• pay from the pension fund the relevant entitlements as stipulated in the Regulations

• invest surplus monies in accordance the Regulations

• ensure that cash is available to meet liabilities as and when they fall due

• take measures as set out in the Regulations to safeguard the fund against the consequences of

employer default

• manage the valuation process in consultation with the Fund’s actuary

• prepare and maintain a FSS and an ISS, both after proper consultation with interested parties

• monitor all aspects of the Fund’s performance and funding, amending the FSS/ISS as

necessary

• effectively manage any potential conflicts of interest arising from its dual role as both fund

administrator and a scheme employer, and

• establish, support and monitor a Local Pension Board (LPB) as required by the Public Service

Pensions Act 2013, the Regulations and the Pensions Regulator’s relevant Code of Practice.

The Individual Employer should:

• deduct contributions from employees’ pay correctly after determining the appropriate employee

contribution rate (in accordance with the Regulations), unless they are a Deferred Employer

• pay all contributions, including their own, as determined by the actuary, promptly by the due

date

• develop a policy on certain discretions and exercise those discretions as permitted within the

regulatory framework

• make additional contributions in accordance with agreed arrangements in respect of, for

example, augmentation of scheme benefits and early retirement strain

• have regard to the Pensions Regulator’s focus on data quality and comply with any requirement

set by the Administering Authority in this context

• notify the Administering Authority promptly of any changes to membership or their financial

“covenant” to the Fund, which may affect future funding, and comply with any particular

notifiable events specified by the Fund.


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• Understand the pensions impacts of any changes to their organisational structure and service

delivery model.

• Understand that the quality of the data provided to the Fund will directly impact on the

assessment of the liabilities and contributions. In particular, any deficiencies in the data would

normally result in the employer paying higher contributions than otherwise would be the case if

the data was of high quality.

The Fund Actuary should:

• prepare valuations including the setting of employers’ contribution rates at a level to ensure fund

solvency after agreeing assumptions with the Administering Authority and having regard to their

FSS and the Regulations

• prepare advice and calculations in connection with bulk transfers and individual benefit-related

matters such as pension strain costs, ill health retirement costs etc

• provide advice and valuations on the termination of admission agreements

• provide advice to the Administering Authority on bonds and other forms of security against the

financial effect on the Fund of employer default

• assist the Administering Authority in assessing whether employer contributions need to be

revised between valuations as required by the Regulations

• advise on funding strategy, the preparation of the FSS and the inter-relationship between the

FSS and the ISS, and

• ensure the Administering Authority is aware of any professional guidance or other professional

requirements which may be of relevance to the Fund Actuary’s role in advising the Fund.


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5SOLVENCY FUNDING TARGET

Securing the “solvency” and “long term cost efficiency” is a regulatory requirement. To meet these

requirements, the Administering Authority’s long term funding objective is for the Fund to achieve

and then maintain sufficient assets to cover 100% of projected accrued liabilities (the “funding

target”) assessed on an ongoing past service basis including allowance for projected final pay

where appropriate. In the long term, the employer rate would ultimately revert to the Future Service

or Primary Rate of contributions.

SO L VENCY AND LO NG TERM EFFICIENCY

Each employer’s contributions are set at such a level to achieve full solvency in a reasonable

timeframe. Solvency is defined as a level where the Fund’s liabilities, i.e. benefit payments, can be

reasonably met as they arise.

Employer contributions are also set in order to achieve long-term cost efficiency. Long-term cost-

efficiency implies that the rate must not be set at a level that is likely to give rise to additional costs

in the future. For example, deferring costs to the future would be likely to result in those costs

being greater overall than if they were provided for at the appropriate time.

When formulating the funding strategy, the Administering Authority has taken into account these

key objectives and also considered the implications of the requirements under Section 13(4)(c) of

the Public Service Pensions Act 2013. As part of these requirements the Government Actuary’s

Department (GAD) must, following an actuarial valuation, report on whether the rate of employer

contributions to the Fund is set at an appropriate level to ensure the “solvency” of the pension fund

and “long term cost efficiency" of the Scheme so far as it relates to the Fund.

DETERMI NATION OF THE SOLVENCY FUNDI NG TARGET AND DEFI CIT

RECO VERY PLAN

The principal method and assumptions to be used in the calculation of the funding target are set out

in Appendix A.

Underlying these assumptions are the following two tenets:

• that the Fund is expected to continue for the foreseeable future; and

• favourable investment performance can play a valuable role in achieving adequate funding over

the longer term.

This allows the Fund to take a longer term view when assessing the contribution requirements for

certain employers.

In considering this the Administering Authority, based on the advice of the Actuary, will consider if

this results in a reasonable likelihood that the funding plan will be successful potentially taking into


1 6

account any changes in funding after the valuation date up to the finalisation of the valuation by 31

March 2020 at the latest.

As part of each valuation separate employer contribution rates are assessed by the Fund Actuary

for each participating employer or group of employers. These rates are assessed taking into account

the experience and circumstances of each employer, following a principle of no cross-subsidy

between the distinct employers in the Fund.

The Administering Authority, following consultation with the participating employers, has adopted the

following objectives for setting the individual employer contribution rates arising from the 2019

actuarial valuation.

The employer contributions will be expressed and certified as two separate elements:

• the Primary rate: a percentage of pensionable payroll in respect of the cost of the future

accrual of benefits and ancillary death in service and ill health benefits

• the Secondary rate: a schedule of % of pay adjustments or lump sum monetary amounts

over 2020/23 in respect of an employer’s surplus or deficit (including phasing adjustments)

DEFI CIT RECOVERY PLAN

It is the Fund’s objective that any funding deficit is eliminated as quickly as the participating

employers can reasonably afford based on the Administering Authority’s view of the employer’s

covenant and risk to the Fund.

Recovery periods will be set by the Fund on a consistent basis across employer categories where

possible and communicated as part of the discussions with employers. This will determine the

minimum contribution requirement and employers will be free to select any shorter deficit recovery

period and higher contributions if they wish, including the option of prepaying the deficit

contributions in one lump sum either on an annual basis or a one-off payment. This will be

reflected in the monetary amount requested via a reduction in overall deficit contributions payable.

The Administering Authority does retain ultimate discretion in applying these principles for

individual employers on grounds of affordability and covenant strength.

The key principles when considering deficit recovery are as follows:

• Subject to consideration of affordability, as a general rule the deficit recovery period will reduce

by at least 3 years for employers at this valuation when compared to the preceding valuation.

This is to target full solvency over a similar (or shorter) time horizon. This is to maintain (as far

as possible) equity between different generations of taxpayers and to protect the Fund against

the potential for an unrecoverable deficit. The deficit recovery period will be set to at least cover

the expected interest costs (actual interest costs will vary in line with investment performance)

on the deficit.

• Employers will have the freedom to adopt a recovery plan on the basis of a shorter period if they

so wish. Subject to affordability considerations and other factors a bespoke period may be

applied in respect of particular employers where the Administering Authority considers this to be

warranted). The average recovery period adopted by all employers will be set out within the

Actuary’s report. Employers will be notified of their individual deficit recovery period as part of

the provision of their individual valuation results.


1 7

• A medium term recovery period target has been set at 12 years which in the long term provides

equity between different generations of taxpayers whilst ensuring the deficit payments are

eliminating a sufficient proportion of the capital element of the deficit, thereby reducing the

interest cost. For those employers who are recovering deficit over a shorter period than 12

years, then their recovery period will be expected to remain the same if their covenant is of

sufficient strength to support the liabilities in the long term. However, where an employer is

expected to exit the Fund then in normal circumstances, the deficit would be recovered over the

remaining period to exit.

• For any employers assessed to be in surplus, their individual contribution requirements will be

adjusted to such an extent that any surplus is used (i.e. run-off) over a 12 year period in line

with the medium term recovery period target for the whole Fund, subject to a total employer

contribution minimum of zero. If an employer is expected to exit the Fund before this period,

contribution requirements will be set to target a nil termination deficit within reasonable

expectations (subject to periodic review).

• Where increases (or decreases) in employer contributions are required from 1 April 2020,

following completion of the 2019 actuarial valuation, the increase (or decrease) from the rates of

contribution payable in the year 2020/21 may be implemented in steps depending on

affordability of contributions as determined by the administering authority. This will be notified to

employers as part of the valuation process. However, where a surplus exists or where there has

been a reduction in contributions paid in respect of an employer’s deficit at the valuation, the

Fund would not consider it appropriate for any increase in contributions paid in respect of future

accrual of benefits to be implemented in steps.

• For employers that do not have a financial year end of 31 March 2020 (e.g. 31 July 2020), the

Fund can, at the employers request before 28th February 2020 allow the employer to continue to

pay their current contribution plan until their financial year end date. The new contribution plan

would then be implemented after this date (i.e. 1 August 2020 if the year-end is 31 July 2020).

• As part of the process of agreeing funding plans with individual employers, the Administering

Authority will consider the use of contingent assets and other tools such as bonds or

guarantees that could assist employing bodies in managing the cost of their liabilities or could

provide the Fund with greater security against outstanding liabilities.

• It is acknowledged by the Administering Authority that, whilst posing a relatively low risk to the

Fund as a whole, a number of smaller employers may be faced with significant contribution

increases that could seriously affect their ability to function in the future. The Administering

Authority therefore would be willing to use its discretion to accept an evidence-based affordable

level of contributions for the organisation for the three years 2020/2023. Any application of this

option is at the ultimate discretion of the Fund officers and Section 151 officer in order to

effectively manage risk across the Fund. It will only be considered after the provision of the

appropriate evidence as part of the covenant assessment and also the appropriate professional

advice.

• For those bodies identified as having a weaker covenant, the Administering Authority will need

to balance the level of risk plus the solvency requirements of the Fund with the sustainability of

the organisation when agreeing funding plans.


1 8

• Notwithstanding the above principles, the Administering Authority, in consultation with the

actuary, has also had to consider whether any exceptional arrangements should apply in

particular cases.

EMPLOYERS EXI T ING THE FUND

• Employers must notify the Fund as soon as they become aware of their planned exit date.

Where appropriate, or at the request of the Scheme Employer, the Fund will review their

certified contribution in order to target a fully funded position at exit. Consideration will be given

to any cap and collar arrangements when reviewing contribution rates. The costs of the

contribution rate review will be payable by the employer or the outsourcing Scheme Employer

(where necessary).

• On the cessation of an employer’s participation in the Fund, in accordance with the Regulations,

the Fund Actuary will be asked to make a termination assessment.

The policy for employers who have a guarantor participating in the Fund:

The residual assets and liabilities and hence any surplus or deficit will transfer back to the

guarantor as a default policy

The interested parties will need to consider any separate agreements that have been put in

place between the exiting employer and the guarantor. In some instances an exit debt may be

payable by an exiting employer before the assets and liabilities are subsumed by the guarantor;

or conversely an exit credit may be payable to an exiting employer prior to subsumption. This

will be managed on a case-by-case basis.

If there is any dispute, then the following arrangements will apply:

• In the case of a surplus, in line with the amending Regulations (The Local Government

Pension Scheme (Amendment) Regulations 2020) the parties will need to make formal

representations to the Administering Authority if they believe an Exit Credit should be

paid outside the policy set out above, or if they dispute the determination of the

Administering Authority. The Fund will notify the parties of the information required to

make the determination on request.

• If the Fund determines an Exit Credit is payable then they will pay this directly to the

exiting employer within 6 months of completion of the final cessation assessment by the

Actuary providing no appeals have been raised with the Fund during this time.

• In the case of a deficit, in order to maintain a consistent approach, the Fund will seek to

recover this from the exiting employer in the first instance and if this fails, the matter will

be referred to the guarantor. If neither the Fund nor the guarantor succeeds in

recovering the deficit, then the deficit will be recovered from the guarantor either as a

further contribution collection or at the next valuation depending on the circumstances.




1 9

If requested, the Administering Authority will provide details of the information considered as

part of the determination. A determination notice will be provided alongside the termination

assessment from the Actuary. The notice will cover the following information and process steps:

1. Details of the employers involved in the process (e.g. the exiting employer and guarantor).

2. Details of the admission agreement, commercial contracts and any amendments to the

terms that have been made available to the Administering Authority and considered as

part of the decision making process. The underlying principle will be that if an employer is

responsible for a deficit, they will be eligible for any surplus. This is subject to the

information provided and any risk sharing arrangements in place.

3. The final termination certification of the exit credit by the Actuary.

4. The Administering Authority’s determination based on the information provided.

5. Details of the appeals process in the event that a party disagrees with the determination

and wishes to make representations to the Administering Authority.

In some instances, the outgoing employer may only be responsible for part of the residual deficit

or surplus as per the separate risk sharing agreement. The default is that any surplus would be

retained by the Fund in favour of the outsourcing employer/guarantor unless the commercial

contract or other arrangements dictate otherwise and the Fund is aware of this or representation

is made by the relevant parties in line with the Regulations (as noted above). For the avoidance

of doubt, where the outgoing employer is not responsible for any termination costs under a risk

sharing agreement then no exit credit will be paid as per the Regulations, provided that the

guarantor makes the Fund aware of the provisions of the risk sharing agreement in any

representation made.

The Government has confirmed that a remedy is required for the LGPS in relation to the

McCloud judgment; however, the final remedy is not currently known with any certainty although

it is expected to be similar to the allowance made in the employer rates at this valuation. Where

a surplus or deficit is being subsumed, no allowance will be made for McCloud within the

calculations. However, if a representation is made to the Administering Authority then a

reasonable estimate for the potential cost of McCloud will need to be included. This will be

calculated in line with the treatment set out in this Funding Strategy Statement for all scheme

members of the outgoing employer who are in the Scheme. For the avoidance of doubt, there

will be no recourse for an employer with regard to McCloud, once the final termination has been

settled and payments have been made. Once the remedy is known, any calculations will be

performed in line with the prevailing regulations and guidance in force at the time.

The policy for employers who do not have a guarantor participating in the Fund or who only

have a guarantee of last resort:

• In the case of a surplus, the Fund pays the exit credit to the exiting employer following

completion of the termination process (within 6 months of completion of the cessation

assessment by the Actuary).

• In the case of a deficit, the Fund would require the exiting employer to pay the

termination deficit to the Fund as a lump sum cash payment (unless agreed otherwise

by the Administering Authority at their sole discretion) following completion of the

termination process.


2 0

Where an employer with no guarantor leaves the Fund and leaves liabilities with the Fund which

the Fund must meet without subsequent recourse to that employer, the valuation of the

termination payment will be calculated using a discount rate based on the lower risk investment

strategy and a more prudent life expectancy assumption. Further details are set out in the

Termination Policy in Appendix C.

The Government has confirmed that a remedy is required for the LGPS in relation to the

McCloud judgment, however the final remedy is not currently known with any certainty although

it is expected to be similar to the allowance made in the employer rates at this valuation. As part

of any termination assessment, a reasonable estimate for the potential cost of McCloud will be

included. This will be calculated in line with the treatment set out in this Funding Strategy

Statement for all scheme members of the outgoing employer. For the avoidance of doubt, there

will be no recourse for an employer with regard to McCloud, once the final termination has been

settled and payments have been made. Once the remedy is known, any calculations will be

performed in line with the prevailing regulations and guidance in force at the time.

The Administering Authority can vary the treatment on a case by case basis at its sole discretion

if circumstances warrant it based on the advice of the Actuary and, for example, may adjust any

exit payment or exit credit to take into account any risk sharing arrangements which exist

between the exiting employer and other Fund employers.

The policy for repayment of exit debts:

The default position for exit payments is that they are paid in full at the point of exit (adjusted for

interest where appropriate). At the discretion of the administering authority, instalment plans

over an agreed period or a Deferred Debt Agreement may be entered into. If an employer

requests that an exit debt payment is recovered over a fixed period of time or that they wish to

enter into a Deferred Debt Agreement with the Fund, they must make a request in writing

covering the reasons for such a request. Any deviation from this default position will be based

on the Administering Authority’s assessment of whether the full exit debt is affordable and

whether it is in the interests of taxpayers to adopt either of the approaches. In making this

assessment the Administering Authority will consider the covenant of the employer and also

whether any security is required and available to back the arrangements.

The termination policy is set out in Appendix C (including details of repayment plans over an

agreed period and Deferred Debt Agreements). This will be reviewed at least on an annual

basis to take into account any emerging trends or changes where appropriate e.g. Regulation

changes and RPI reform which will affect the termination assessment for employers.


2 1

6 LINK TO INVESTMENT POLICY A ND THE INVESTMENT STRATEGY STATEMENT ( ISS)

The results of the 2019 valuation show the liabilities to be 94% covered by the current assets, with

the funding deficit of 6% being covered by future deficit contributions.

In assessing the value of the Fund’s liabilities in the valuation, allowance has been made for growth

asset out-performance as described below, taking into account the investment strategy adopted by

the Fund, as set out in the ISS.

It is not possible to construct a portfolio of investments which produces a stream of income exactly

matching the expected liability profile. However, it is possible to construct a portfolio which

represents the “minimum risk” investment position which would deliver a very high certainty of real

returns above assumed CPI inflation. Such a portfolio would consist of a mixture of long-term index-

linked, fixed interest gilts and possible “swaps”.

Investment of the Fund’s assets in line with this portfolio would minimise fluctuations in the Fund’s

funding position between successive actuarial valuations.

If, at the valuation date, the Fund had been invested in this portfolio, then in carrying out this valuation

it would not be appropriate to make any allowance for growth assets out-performance or any

adjustment to market implied inflation assumption due to supply/demand distortions in the bond

markets. This would result in real return versus CPI inflation of minus 1% per annum at the valuation

date. On this basis of assessment, the assessed value of the Fund’s liabilities at the valuation would

have been significantly higher, resulting in a funding level of 56%. This is a measure of the level of

reliance on future investment returns i.e. level of investment risk being taken.

Departure from a minimum risk investment strategy, in particular to include growth assets such as

equities, gives a better prospect that the assets will, over time, deliver returns in excess of CPI

inflation and reduce the contribution requirements. The target solvency position of having sufficient

assets to meet the Fund’s pension obligations might in practice therefore be achieved by a range of

combinations of funding plan, investment strategy and investment performance.

The overall strategic asset allocation is set out in the Investment Strategy Statement.


2 2

The current strategy is:

Based on the investment strategy above and the Actuary’s assessment of the return expectations for

each asset class, this leads to an overall best estimate average expected return of 2.7% per annum

in excess of CPI inflation as at the valuation date. For the purposes of setting funding strategy

however, the Administering Authority believes that it is appropriate to take a margin for prudence on

these return expectations. This margin, however, has been reduced to take account of the risk

management strategies implemented to reduce the volatility of returns within the investment strategy.

A measure of overall prudence to protect against adverse experience in the future is to consider the

funding level if it was assessed on a “best estimate” basis for all the principal assumptions (mainly

the investment return and life expectancy). The actuary has assessed this funding level as 113%.

This level of prudence is built in to allow the Fund to address adverse events whilst maintain stability

(within reasonable parameters) in employer contributions where appropriate.

R ISK MANAGEM ENT STRATEG Y

In the context of managing various aspects of the Fund’s financial risks, the Administering Authority

has implemented a number of risk management techniques. In particular:

• Equity Protection - the Fund has implemented protection against potential falls in the

equity markets via the use of derivatives. The aim of the protection is to provide further

stability (or even a reduction) in employer deficit contributions (all other things equal) in

the event of a significant equity market fall (although it is recognised that it will not protect

the Fund in totality).

• Liability Driven Investments (LDI) – the Fund has implemented an LDI strategy in

order to hedge part of the Fund’s assets against changes in liabilities for one or

more employers.

40%

10%10%5%

10%

5%

12%

8%Developed Market Equities

Emerging Market Equities

Diversified Growth Funds (DGF)

Hedge Funds

Property

Infrastructure

Index Linked Bonds

Corporate Bonds


2 3

• Lower risk investment strategy – the Fund updated its lower risk investment strategy

(previously known as the “corporate bond” strategy) with effect from 1 April 2019.

This strategy is predominately linked to corporate bond investment assets and is

expected to reduce funding volatility for employers within it.

The principal aim of these risk management techniques is to effectively look to provide more

certainty of real investment returns vs CPI inflation and/or protect against volatility in the termination

position. It is designed to reduce risk and provide more stability/certainty of outcome for funding and

ultimately employer contribution rates. The effect of these techniques has been allowed for in the

2019 actuarial valuation calculations and could have implications on future actuarial valuations and

the assumptions adopted. Further details of the framework have been included in the ISS.

HIGHER AND LOWER RISK I N V E S T M E N T STRATEGY

The Fund has improved its lower risk investment strategy (previously described as the

“corporate bond” strategy) that it offers to employers. Existing “corporate bond” employers will be

transitioned into the lower risk investment strategy with effect from 1 April 2019. This strategy

exhibits a lower investment risk than the current whole fund strategy. If an employer is deemed to

have a weaker covenant than others in the Fund, is planning to exit the Fund or it would like to

target a lower risk strategy, the Administering Authority has the discretion to move that employer

(typically following discussions with the employer) into this investment strategy to protect the Fund

as a whole. The current Fund investment strategy will be known as the “higher risk investment

strategy”.

The lower risk investment strategy is predominately linked to corporate bond investment assets

and is expected to reduce funding volatility for employers within it (as a minimum this will be

reviewed following each actuarial valuation). In these circumstances, the discount rate is directly

linked to the yields on the corporate bonds within the lower risk investment strategy. In addition,

the strategy has exposure to the Liability Driven Investment (“LDI”) portfolio to provide protection

against changes in market inflation expectations. The implementation of this improved strategy will

better match the overall changes in the liabilities included in the strategy. All other things equal,

this would result in greater stability of the deficit and therefore contributions for employers.

Within the next valuation cycle, the Fund will consider the merits of implementing another alternative

investment strategy where the risk sits between the higher and lower risk strategies. This strategy

will have a lower level of growth assets compared with the higher risk whole Fund strategy.

The applicable investment strategy will be reflected in the relevant employer’s notional asset

share, funding basis and contribution requirements.


2 4

7 IDENTIFICATION OF RISKS AND COUNTER -MEASURES

The funding of defined benefits is by its nature uncertain. Funding of the Scheme is based on both

financial and demographic assumptions. These assumptions are specified in the actuarial valuation

report. When actual experience is not in line with the assumptions adopted, a surplus or shortfall will

emerge at the next actuarial assessment and will require a subsequent contribution adjustment to

bring the funding back into line with the target.

The Administering Authority has been advised by the actuary that the greatest risk to the funding

level is the investment risk inherent in the predominantly equity based strategy, so that actual asset

out-performance between successive valuations could diverge significantly from that assumed in the

long term. The Actuary’s formal valuation report includes a quantification of the key risks in terms of

the effect on the funding position.

F I NANCI AL

The financial risks are as follows:-

• Investment markets fail to perform in line with expectations

• Protection and risk management policies fail to perform in line with expectations

• Market outlook moves at variance with assumptions

• Investment Fund Managers fail to achieve performance targets over the longer term

• Asset re-allocations in volatile markets may lock in past losses

• Pay and price inflation significantly more than anticipated

• Future underperformance arising as a result of participating in the larger asset pooling vehicle

• An employer ceasing to exist without prior notification, resulting in a large exit credit requirement from the Fund impacting on cashflow requirements.

Any increase in employer contribution rates (as a result of these risks) may in turn impact on the

service delivery of that employer and their financial position.

In practice the extent to which these risks can be reduced is limited. However, the Fund’s asset

allocation is kept under constant review and the performance of the investment managers is regularly

monitored. In addition, the implementation of the risk management framework will help to reduce

the key financial risks over time.

DEMOG RAPHIC

The demographic risks are as follows:-

• Future changes in life expectancy (longevity) that cannot be predicted with any certainty

• Potential strains from ill health retirements, over and above what is allowed for in the valuation assumptions for employers

• Unanticipated acceleration of the maturing of the Fund resulting in materially negative cashflows and shortening of liability durations


2 5

Increasing longevity is something which government policies, both national and local, are designed

to promote. It does, however, result in a greater liability for pension funds.

Ill health retirements can be costly for employers, particularly small employers where one or two

costly ill health retirements can take them well above the “average” implied by the valuation

assumptions. Increasingly we are seeing employers mitigate the number of ill health retirements by

employing HR / occupational health preventative measures. These in conjunction with ensuring the

regulatory procedures in place to ensure that ill-health retirements are properly controlled, can help

control exposure to this demographic risk. The Fund’s ill health captive arrangement will also help to

ensure that the eligible employers are not exposed to large deficits due to the ill health retirement of

one or more of their members (see further information in Appendix I).

Apart from the regulatory procedures in place to ensure that ill-health retirements are properly

controlled, employing bodies should be doing everything in their power to minimise the

number of ill-health retirements.

Early retirements for reasons of redundancy and efficiency do not immediately affect the solvency of

the Fund because they are the subject of a direct charge.

With regards to increasing maturity (e.g. due to further cuts in workforce and/or restrictions on new

employees accessing the Fund), the Administering Authority regularly monitors the position in terms

of cashflow requirements and considers the impact on the investment strategy.

I NSURANCE O F CERTAI N BENEFI TS

The contributions for any employer may be varied as agreed by the Actuary and Administering

Authority to reflect any changes as a result of any benefit costs being insured with a third party or

internally within the Fund. More detail on how the Fund is implementing the captive insurance for ill

health costs is set out in Appendix I.

REG ULATO RY

The key regulatory risks are as follows:-

• Changes to Regulations, e.g. changes to the benefits package, retirement age, potential new entrants to scheme,

• Changes to national pension requirements and/or HMRC Rules

• Political risk that the guarantee from the Department for Education for academies is removed or modified along with the operational risks as a consequence of the potential for a large increase in the number of academies in the Fund due to Government policy.

Membership of the Local Government Pension Scheme is open to all local government staff and

should be encouraged as a valuable part of the contract of employment. However, increasing

membership does result in higher employer monetary costs.

GOVERNANCE

The Fund has done as much as it believes it reasonably can to enable employing bodies and scheme

members (via their trades unions) to make their views known to the Fund and to participate in the

decision-making process. So far as the revised Funding Strategy Statement is concerned, the

Administering Authority circulated copies of the first draft to all employing bodies for their comments

and placed a copy on the Fund’s website. It has been approved by the Committee after the Fund

received feedback from the employing bodies.


2 6

Governance risks are as follows:-

• The quality of membership data deteriorates materially due to breakdown in processes for

updating the information resulting in liabilities being under or overstated

• Administering Authority unaware of structural changes in employer’s membership (e.g. large fall

in employee numbers, large number of retirements) with the result that contribution rates are set

at too low a level

• Administering Authority not advised of an employer closing to new entrants, something which

would normally require an increase in contribution rates

• An employer ceasing to exist with insufficient funding or a bond which is not adequate.

For these risks to be minimised much depends on information being supplied to the Administering

Authority by the employing bodies. Arrangements are strictly controlled and monitored (e.g. the

implementation of iConnect for transferring data from employers), but in most cases the employer,

rather than the Fund as a whole, bears the risk.


2 7

8 MONITORING AND REVIEW

The Administering Authority has taken advice from the actuary in preparing this Statement.

A full review of this Statement will occur no less frequently than every 3 years, to coincide with

completion of a full statutory actuarial valuation and every review of employer rates or interim

valuation. Any review will take account of the current economic conditions and will also reflect any

legislative changes.

The Administering Authority will monitor the progress of the funding strategy between full actuarial

valuations. If considered appropriate, the funding strategy will be reviewed (other than as part of the

valuation process), for example, if there:

• has been a significant change in market conditions, and/or deviation in the progress of the

funding strategy

• have been significant changes to the Scheme membership, or LGPS benefits

• have been changes to the circumstances of any of the employing authorities to such an extent

that they impact on or warrant a change in the funding strategy

• have been any significant special contributions paid into the Fund.

When monitoring the funding strategy, if the Administering Authority considers that any action is

required, the relevant employers will be contacted. In the case of an employer who may exit the

Fund, there is statutory provision for rates to be amended between valuations but it is unlikely that

this power will be invoked other than in exceptional circumstances.

REVI EW OF CONTRIBUTIONS

In line with the Regulations, the Administering Authority has the ability to review employer

contributions between valuations. The Administering Authority and employers have the following

flexibilities:

1. The Administering Authority may review the contributions of an employer where there has been

a significant change to the liabilities of an employer.

2. The Administering Authority may review the contributions of an employer where there has been

a significant change in the employer’s covenant.

3. An employer may request a review of contributions from the Administering Authority if they feel

that either point 1 or point 2 applies to them.

Consideration will be given to any risk sharing arrangements (e.g. cap and collar arrangements)

when reviewing contribution rates. Further information is set out within the policy in Appendix D.

THE M C CLOUD J UDGMENT

The cost management process was set up by HMT, with an additional strand set up by the

Scheme Advisory Board (for the LGPS). The aim of this was to control costs for employers and

taxpayers via adjustments to benefits and/or employee contributions.


2 8

As part of this, it was agreed that employers should bear the costs/risks of external factors such as

the discount rate, investment returns and inflation changes, whereas employees should bear the

costs/risks of other factors such as wage growth, life expectancy changes, ill health retirement

experience and commutation of pension.

The outcomes of the cost management process were expected to be implemented from 1 April

2019, based on data from the 2016 valuations for the LGPS. This has now been put on hold due

to age discrimination cases brought in respect of the firefighters and judges schemes, relating to

protections provided when the public sector schemes were changed (which was on 1 April 2014 for

the LGPS and 1 April 2015 for other Schemes).

The Government have confirmed that this judgment will result in a remedy being required for the

LGPS. The Scheme Advisory Board issued guidance here

(http://www.lgpsboard.org/images/Other/Advice_from_the_SAB_on_McCloud_May_2019.pdf)

which sets out how the McCloud case should be allowed for within the 2019 valuation. As a

consequence, cost management is expected to remain paused until the remedy is known and

therefore no allowance has been made in this valuation. This will be reconsidered once the final

outcomes are known.

The potential impact of the McCloud judgment (based on the information available at the time) has

been quantified and communicated to employers as part of the 2019 valuation. This has been

assessed by removing the current age criteria applied to the underpin implemented in 2014 for the

LGPS. This underpin therefore would apply to all active members as at 1 April 2012. Employers

will be able to choose to pay these estimated costs over 2020/23 in their certified contributions.

Alternatively, they will need to make provision within their budgets and backdated contributions

would be paid once the remedy is known. The mechanism to achieve this has been set out in the

Actuary’s certificate.

http://www.lgpsboard.org/images/Other/Advice_from_the_SAB_on_McCloud_May_2019.pdf


2 9

APPENDIX A - ACTUARIAL METHOD AND ASSUMPTIONS

M ETHOD

The actuarial method to be used in the calculation of the solvency funding target is the Projected

Unit method, under which the salary increases assumed for each member are projected until that

member is assumed to leave active service by death, retirement or withdrawal from service. This

method implicitly allows for new entrants to the scheme on the basis that the overall age profile of

the active membership will remain stable. As a result, for those employers which are closed to new

entrants, an alternative method is adopted, which makes advance allowance for the anticipated

future ageing and decline of the current closed membership group potentially over the period of the

rates and adjustments certificate.

F I NANCI AL ASSUMPTIO NS – SO LVENCY FUNDI NG TARGET

Investment return (discount rate)

The discount rate for the higher risk valuation funding basis has been derived from the expected

return on the Fund assets based on the long term strategy set out in the Investment Strategy

Statement (ISS). It includes appropriate margins for prudence. When assessing the appropriate

discount rate, consideration has been given to the returns in excess of CPI inflation (as derived

below). The discount rate at this valuation is based on an assumed return of 1.75% per annum above

CPI inflation i.e. a real return of 1.75% per annum and a total discount rate of 4.15% per annum.

This real return will be reviewed from time to time based on the investment strategy, market outlook

and the Fund’s overall risk metrics. The discount rate will be reviewed as a matter of course at the

time of a formal valuation.

For those employers who are funding on a lower risk funding basis, the discount rate used will be

linked directly to the yields available for the assets within the lower risk investment strategy. The

typical discount rate used at the valuation date is 2.60% per annum, which is equivalent to a real

return of 0.2% per annum above inflation.

Inflation (Consumer Prices Index)

The inflation assumption will be taken to be the investment market’s expectation for RPI inflation as

indicated by the difference between yields derived from market instruments, principally conventional

and index-linked UK Government gilts as at the valuation date (reflecting the profile and duration of

the Scheme’s accrued liabilities) but subject to an adjustment due to retirement pensions being

increased annually by the change in the Consumer Price Index rather than the Retail Price Index.

The overall average reduction to the assumption to long term RPI inflation to arrive at the CPI inflation

assumption at the valuation date is 1.00% per annum. The CPI inflation assumption at the valuation

date is 2.40% per annum. This adjustment to the RPI inflation assumption will be reviewed from time

to time to take into account the reform of the RPI index from 2030 as announced by the Chancellor

of the Exchequer and any other market factors which affect the estimate of CPI inflation.


3 0

Salary increases

In relation to benefits earned prior to 1 April 2014, the assumption for real salary increases (salary

increases in excess of price inflation) will be determined by an allowance of 1.50% p.a. over the

inflation assumption as described above. This includes allowance for promotional increases. In

addition to the long term salary increase assumption allowance has been made for expected short

term pay restraint for some employers as budgeted in their financial plan. Depending on the

circumstances of the employer, the variants on short term pay that have been applied are either no

allowance or allowances based on evidence from the employer of 2%, 2.5% or 3% per annum for

each year from the valuation date up to 31 March 2023. The allowance made has been notified to

each employer separately on their individual results schedule.

Application of bespoke salary increase assumptions as put forward by individual employers will be

at the ultimate discretion of the Administering Authority but as a minimum must be reasonable and

practical. To the extent that experience differs to the assumption adopted, the effects will emerge at

the next actuarial valuation.

Pension Increases/Indexation of CARE benefits

Increases to pensions are assumed to be in line with the inflation (CPI) assumption described above.

This is modified appropriately to reflect any benefits which are not fully indexed in line with the CPI

(e.g. Guaranteed Minimum Pensions where the LGPS is not required to provide full indexation). For

members in pensionable employment, their CARE benefits are also indexed by CPI although this

can be less than zero, i.e. a reduction in benefits, whereas for pension increases this cannot be

negative, as pensions cannot be reduced.

DEMOG RAPHIC ASSUM PTIO NS

Mortality/Life Expectancy

The mortality in retirement assumptions will be based on the most up-to-date information in relation

to self-administered pension schemes published by the Continuous Mortality Investigation (CMI),

making allowance for future improvements in longevity and the experience of the scheme. The

mortality base tables used are set out below, with a loading reflecting Fund specific experience. The

derivation of the mortality assumption is set out in separate advice as supplied by the Actuary. A

specific mortality assumption has also been adopted for current members who retire on the grounds

of ill health. For all members, it is assumed that the trend in longevity seen over recent time periods

(as evidenced in the 2018 CMI analysis) will continue in the longer term and as such, the

assumptions build in a level of longevity ‘improvement’ year on year in the future in line with the CMI

2018 projections and a long term improvement trend of 1.75% per annum.


3 1

As an indication of impact, we have set out the life expectancies at age 65 based on the 2016 and

2019 assumptions:

Male Life Expectancy at 65 Female Life Expectancy at 65

2016 2019 2016 2019

Pensioners 23.7 23.1 26.2 25.2

Actives aged 45 now 26.3 24.6 29.0 27.2

Deferreds aged 45 now 24.2 23.2 27.8 25.9

For example, a male pensioner, currently aged 65, would be expected to live to age 88.1. Whereas

a male active member aged 45 would be expected to live until age 89.6. This is a reflection of the

expected improvement in life expectancy over the next 20 years in the assumptions above.

The mortality before retirement has also been reviewed based on LGPS wide experience.

Commutation

It has been assumed that, on average, 50% of retiring members will take the maximum tax-free cash

available at retirement and 50% will take the standard 3/80ths cash sum. The option which members

have to commute part of their pension at retirement in return for a lump sum is a rate of £12 cash for

each £1 p.a. of pension given up.

Other Demographics

Following an analysis of Fund experience carried out by the Actuary, the incidence of ill health

retirements, withdrawal rates and the proportions married/civil partnership assumption remain in line

with the assumptions adopted for the last valuation. In addition, no allowance will be made for the

future take-up of the 50:50 option. Where any member has actually opted for the 50:50 scheme,

this will be allowed for in the assessment of the rate for the next 3 years. Other assumptions are as

per the last valuation.

Expenses

Expenses are met out of the Fund, in accordance with the Regulations. This is allowed for by adding

0.6% of pensionable pay to the contributions as required from participating employers. This addition

is reassessed at each valuation. Investment expenses have been allowed for implicitly in determining

the discount rates.

Discretionary Benefits

The costs of any discretion exercised by an employer in order to enhance benefits for a member

through the Fund will be subject to additional contributions from the employer as required by the

Regulations as and when the event occurs. As a result, no allowance for such discretionary benefits

has been made in the valuation


3 2

M ETHOD AND ASSUMPTIONS USED IN CALCULATING THE COST OF

FUTURE ACCRUAL (O R PRIMARY RATE )

The future service liabilities are calculated using the same assumptions as the funding target except

that a different financial assumption for the discount rate is used. A critical aspect here is that the

Regulations state the desirability of keeping the “Primary rate” (which is the future service rate) as

stable as possible so this needs to be taken into account when setting the assumptions.

As future service contributions are paid in respect of benefits built up in the future, the Primary rate

should take account of the market conditions applying at future dates, not just the date of the

valuation, thus it is justifiable to use a slightly higher expected return from the investment strategy.

In addition, the future liabilities for which these contributions will be paid have a longer average

duration than the past service liabilities as they relate to active members only.

The financial assumptions in relation to future service (i.e. the Primary rate) are based on an overall

assumed real discount rate of 2.25% per annum above the long term average assumption for

consumer price inflation of 2.40% per annum. This leads to a discount rate of 4.65% per annum.

EMPLOYER ASSET SHARES

The Fund is a multi-employer pension scheme that is not formally unitised and so individual employer

asset shares are calculated at each actuarial valuation. This means it is necessary to make some

approximations in the timing of cashflows and allocation of investment returns when deriving the

employer asset share.

In attributing the overall investment performance obtained on the assets of the Fund to each

employer in either employer strategy, a pro-rata principle is adopted. This approach is effectively

one of applying the appropriate notional individual employer investment strategy to each employer

unless this is varied by agreement between the employer and the Fund at the sole discretion of the

Administering Authority.

At each review, cashflows into and out of the Fund relating to each employer, any movement of

members between employers within the Fund, along with investment return earned on the asset

share, are allowed for when calculating asset shares at each valuation.

Other adjustments are also made on account of the funding positions of orphan bodies which fall to

be met by all other active employers in the Fund.


3 3

SUMM ARY OF KEY W HOLE FUND ASSUM PTIO NS USED FO R

CALCULATI NG FUNDI NG TARGET AND CO ST OF FUTURE ACCRUAL (THE

“ PRIM ARY RATE ” ) FO R THE 201 9 ACTUARIAL VALUATIO N

Life expectancy assumptions

The post retirement mortality tables adopted for this valuation are set out below:

Current Status Retirement Type Mortality Table

Annuitant

Normal Health 92% S3PMA_CMI_2018 [1.75%]

87% S3PFA_M_CMI_2018 [1.75%]

Dependant 119% S3PMA_CMI_2018 [1.75%] 87% S3DFA_CMI_2018 [1.75%]

Ill Health 113% S3IMA_CMI_2018 [1.75%] 127% S3IFA_CMI_2018 [1.75%]

Future Dependant 117% S3PMA_CMI_2018 [1.75%] 106% S3DFA_CMI_2018 [1.75%]

Active

Normal Health 98% S3PMA_CMI_2018 [1.75%]

88% S3PFA_M_CMI_2018 [1.75%]

Ill Health 115% S3IMA_CMI_2018 [1.75%] 138% S3IFA_CMI_2018 [1.75%]

Deferred All 118% S3PMA_CMI_2018 [1.75%]

105% S3PFA_M_CMI_2018 [1.75%]

Future Dependant Dependant 124% S3PMA_CMI_2018 [1.75%] 113% S3DFA_CMI_2018 [1.75%]

Other demographic assumptions are set out in the Actuary’s formal report.

Long-term yields

Market implied RPI inflation 3.40% p.a.

Solvency Funding Target financial assumptions

Investment return/Discount Rate 4.15% p.a.

CPI price inflation 2.40% p.a.

Short Term Salary Increases Varies by employer - 4 year period to 31 March 2023 as noted above

Long Term Salary increases 3.90% p.a.

Pension increases/indexation of CARE benefits 2.40% p.a.

Future service accrual financial assumptions

Investment return/Discount Rate 4.65% p.a.

CPI price inflation 2.40% p.a.

Short Term Salary Increases Varies by employer - 4 year period to 31 March 2023 as noted above

Long Term Salary increases 3.90% p.a.

Pension increases/indexation of CARE benefits 2.40% p.a.


3 4

APPENDIX B - ADMISSION POLICY

ENTRY TO THE FUND

M ANDATO RY SCHEME EMPLOYERS

Certain employing bodies are required to join the scheme under the Regulations. These bodies

include tax raising bodies, those funded by central government (academies and colleges) and

universities (reliant on non-government income). Academies also fall under this category.

DESIGNATING BODIES

Designating bodies are permitted to join the scheme if they pass a resolution to this effect.

Designating bodies including connected and controlled entities are not required under the

Regulations to provide a guarantee. Apart from connected and controlled entities, these bodies

usually have tax raising powers.

ADMI SSIO N BODI ES

An admitted body is an employer which, if it satisfies certain regulatory criteria, can apply to

participate in the Fund. If its application is accepted by the administering authority, it will then have

an “admission agreement”. In accordance with the Regulations, the admission agreement sets out

the conditions of participation of the admitted body including which employees (or categories of

employees) are eligible to be members of the Fund.

Admitted bodies can join the Fund if

1. They provide a service for a scheme employer as a result of an outsourcing (formerly known as

Transferee Admission Bodies)

2. They provide some form of public service or their funding derives primarily from local or central

government. In reality they take many different forms but the one common element is that they

are “not for profit” organisations (formerly known as Community Admission Bodies).

Admitted bodies may only join the Fund if they are guaranteed by a scheme employer. When the

agreement or service provision ceases, the Fund’s policy is that the assets and liabilities of the

admission body will in all cases revert to the outsourcing scheme employer or guaranteeing

employer. Where there is an agreement in place whereby the admission body is required to make

good any deficit which exists on termination, the Fund will seek to recover the amount due in the

first instance; however, if it fails to do so, it will be a matter for outsourcing scheme employer or

guarantor to enforce this agreement by instituting recovery procedures. Any sums recovered from

outgoing admission bodies on termination must be paid into the Fund for the benefit of the

outsourcing scheme employer or guarantor.

Where an admission agreement involves multiple guarantors (typically under 2 above), who may

not all be employers in the Fund, it may not be practical for any deficit on closure to be transferred

to another employer in the Fund. Where this is the case, the lower risk funding basis would apply

for valuing the liabilities from the outset.


3 5

CONNECTED AND CONTRO LLED ENTIT I ES

Connected entities and controlled entities, by definition, have close ties to a scheme employer

given that they are either included in the financial statements of the scheme employer or

owned/controlled by a scheme employer.

Although connected and controlled entities are “Designating Bodies” under the Regulations, they

have similar characteristics to admitted bodies (in that there is an “outsourcing employer”).

However, the Regulations do not strictly require such bodies to have a guarantee from a scheme

employer.

To limit the risk to the Fund, the lower risk funding basis for calculating the liabilities will apply to all

new connected and controlled entities unless a scheme employer provides a guarantee for their

connected or controlled entity, in which case the higher risk valuation funding basis will be applied

to value the liabilities.

CHI LDREN’S CENTRE TRANSFER TO ACADEM Y TRUSTS

Local education authorities have an obligation to provide Children’s Centres under the Childcare

Act 2006. The Act places duties on these authorities in relation to establishing and running

Children’s Centres and therefore the financial obligation to cover the LGPS costs of eligible staff

remains a responsibility of the local education authority regardless of service delivery vehicle. The

local education authority is liable for all the LGPS liabilities of the Children’s Centre. The extensive

academisation programme in recent years has led to a number of Children’s Centres being run by

an Academy or Academy Trust.

As the staff cannot be employed directly by an Academy or Academy Trust, the Fund will permit

admission of a separate participating employer (with its own contribution rate requirements based

on the transferring staff), through a tri-partite admission agreement between the Fund, the Local

Education Authority of the ceding Council and the body responsible for managing the Children’s

Centre (this could be an Academy Trust or private sector employer).

SECO ND G ENERATIO N OUTSOURCINGS FOR STAFF NOT EMPLOYED BY

THE SCHEME EMPLO YER CONTRACTI NG THE SERVI CES TO AN

ADMI TTED BO DY

A 2nd generation outsourcing is one where a service is being outsourced for the second time,

usually after the previous contract has come to an end. Best Value Authorities, principally the

unitary authorities, are bound by The Best Value Authorities Staff Transfers (Pensions) Direction

2007 so far as 2nd generation outsourcings are concerned. In the case of most other employing

bodies, they must have regard to Fair Deal Guidance issued by the Government.

It is usually the case that where services have previously been outsourced, the transferees are

employees of the contractor as opposed to the original scheme employer and as such will transfer

from one contractor to another without being re-employed by the original scheme employer. There

are even instances where staff can be transferred from one contractor to another without ever

being employed by the outsourcing scheme employer that is party to the Admission Agreement.

This can occur when one employing body takes over the responsibilities of another, such as a

maintained school (run by the local education authority) becoming an academy. In this instance the

contracting body is termed a ‘Related Employer’ for the purposes of the Local Government

Pension Scheme Regulations and is obliged to guarantee the pension liabilities incurred by the

contractor. These liabilities relate both to any staff whom it may be outsourcing for the first time


3 6

and to any staff who may be transferring from one contractor to another having previously been

employed by a Scheme employer prior to the initial outsourcing.

A “Related Employer” is defined as “any Scheme employer or other such contracting body which is

a party to the admission agreement (other than an administering authority in its role as an

administering authority)”.

LG PS REGULATIONS 2013 : SCHEDULE 2 PART 3 , PARA G RAPH 8

Where, for any reason, it is not desirable for an admission body to enter into an indemnity or bond,

the admission agreement must provide that the admission body secures a guarantee in a form

satisfactory to the administering authority from—

(a) a person who funds the admission body in whole or in part;

(b) in the case of an admission body falling within the description in paragraph 1(d), the Scheme

employer referred to in that paragraph;

(d) a body that is providing or will provide a service or assets in connection with the exercise of a

function of a Scheme employer as a result of—

(i) the transfer of the service or assets by means of a contract or other arrangement,

(ii) a direction made under section 15 of the Local Government Act 1999 (115) (Secretary of State’s

powers),

(iii) directions made under section 497A of the Education Act 1996 (116) ;

(c) a person who—

(i) owns, or

(ii) controls the exercise of the functions of, the admission body; or

In accordance with the above Regulations, the Fund requires a guarantee from the Related

Employer in most instances. In exceptional circumstances the admission body may supply a bond.

Separately from this, a Related Employer may seek a bond from the admitted body to protect itself

taking into account the risk assessment carried out by the Fund actuary.


3 7

APPENDIX C - TERMINATION POLICY, FLEXIBILITY FOR EXIT PAYMENTS AND DEFERRED DEBT AGREEMENTS

EXITING THE FUND

TERMINATION POLI CY

Unless entering a DDA, an employer ceases to participate in the Fund when the last active

member leaves the Fund or when a suspension notice ends. The employer then becomes an

“exiting employer” under the Regulations and the Fund is required to obtain an actuarial valuation

of that employer’s liabilities in respect of the benefits of the exiting employer’s current and former

employees along with a termination contribution certificate. When an employer exits the Fund the

Regulations give power to the Fund to set a repayment plan to recover the outstanding debt over a

period at its sole discretion - this will depend on the affordability of the repayments and financial

strength of the exiting employer. Once this repayment plan is set the payments would not be

reviewed for changes in the funding position due to market or demographic factors.

The Fund’s policy for termination payment plans is as follows:

1. The default position is for exit payments and exit credits to be paid immediately in full once the

cessation assessment has been completed by the Actuary and any determination notice issued

by the Fund, if applicable, unless there is a risk sharing arrangement in place with a

guaranteeing Scheme employer in the Fund whereby the exiting employer is not responsible for

any exit payment. In these cases the default position is no exit credit will be paid as default

unless representation is made by the parties to the contrary. Further detail is set out below.

2. At the discretion of the Administering Authority, instalment plans over a defined period will only

be agreed when there are issues of affordability that risk the financial viability of the

organisation and the ability of the Fund to recover the debt.

3. The exit valuation costs on the Avon Pension Fund website and any additional costs incurred

will be identified and notified to both exiting employer and outsourcing employer/guarantor and

included in the exit valuation. These costs will be paid by the exiting employer unless the

outsourcing Scheme employer or guarantor directs otherwise, in which case the costs will be

borne by the outsourcing Scheme employer or guarantor.

EMPLOYERS WI THO UT A GUARANTOR OR THAT ONLY HAVE A

G UARANTEE OF LAST RESORT

The lower risk funding basis is used for assessing liabilities on termination unless the

Administering Authority agrees otherwise based on the advice of the Actuary. This basis mitigates

against financial market risks and will to a large extent protect the Fund from these risks. In the

event that the lower risk basis produces a higher discount rate than the higher risk valuation

funding basis, the higher risk valuation funding basis will be used.


3 8

The assumptions used will be consistent with the previous valuation assumptions, updated for

market yields and inflation applying at the cessation date. With the following exceptions:

• The discount rate will be based on the investment returns of the lower risk investment

strategy. The Actuary will use a deduction from the discount rate to reflect a reasonable

estimate of; the investment expenses, the potential asset default and reinvestment risk

associated with the asset strategy, the associated costs of termination and any other

reasonable prudent margins that are appropriate based on the advice of the Actuary. This

will be reviewed from time-to-time and will vary dependent on market conditions and the

assets held in the lower risk strategy. At the valuation date, the discount rate used would

have been 2.60% per annum.

• The assumptions will allow for any further margins the Administering Authority deems

appropriate based on the advice of the Actuary.

• In addition, since the valuation date, it has been announced that RPI inflation is likely to be

reformed, with the reform potentially meaning the index is closer to the CPIH inflation

measure. This would need to be reflected when deriving an updated market estimate of

CPI inflation. This adjustment to the RPI inflation assumption will be reviewed from time to

time to take into account the reform of the RPI index from 2030 and any other market

factors which affect the estimate of CPI inflation.

For example when assessing a termination position (at March 2021) we will adjust the

market RPI inflation to arrive at the CPI inflation assumption on the higher risk strategy by

deducting 0.6% per annum as opposed to the 1.0% per annum at the valuation date when

assessing an employer’s termination position. This adjustment will be kept under review as

more details emerge on the reform of RPI.

• However, this does not provide against future adverse demographic experience relative to

the assumptions which could emerge at future valuations. This risk is managed by

including a higher level of prudence in the demographic assumptions on termination to

further protect the remaining employers. The termination basis for an outgoing employer

currently includes an adjustment to the assumption for longevity improvements over time by

increasing the rate of improvement in mortality rates to 2.25% p.a. from those used in the

2019 valuation for ongoing funding and contribution purposes. This will be reviewed from

time to time to allow for any material changes in life expectancy trends and will be formally

reassessed at the next valuation.

There may be costs associated with a transition of assets into the lower risk strategy. The

Administering Authority reserves the right to pass these costs on to the employer usually via a

deduction in the notional asset share. The policy for such employers will be:

• In the case of a surplus, the Fund pays the exit credit to the exiting employer following

completion of the termination process (within 6 months of completion of the cessation

assessment by the Actuary, providing no appeals have been raised with the Fund during

this time).

• In the case of a deficit, the Fund would require the exiting employer to pay the termination

deficit to the Fund as a lump sum cash payment (unless agreed otherwise by the


3 9

Administering Authority at their sole discretion) following completion of the termination

process.


judgment; however the final remedy is not currently known with any certainty although it is

expected to be similar to the allowance made in employer rates at this valuation. As part of any

termination assessment, a reasonable estimate for the potential cost of McCloud will be included.

This will be calculated in line with the treatment set out in this Funding Strategy Statement for all

scheme members of the outgoing employer. For the avoidance of doubt, there will be no recourse

for an employer with regard to McCloud, once the final termination has been settled and payments

have been made. Once the remedy is known, any calculations will be performed in line with the

prevailing regulations and guidance in force at the time.

The Administering Authority can vary the treatment on a case-by-case basis at its sole discretion if

circumstances warrant it based on the advice of the Actuary.

EMPLOYERS WI TH A GUARANTO R

If, instead, the employing body has a guarantor within the Fund or a successor body exists to take

over the employing body’s liabilities, the Fund’s policy is that the higher risk valuation funding basis

will be used for the termination assessment unless the guarantor informs the Fund otherwise.

The guarantor or successor body will then subsume the assets and liabilities (and any surplus or

deficit) of the employing body within the Fund under the default policy. In some instances, the

outgoing employer may only be responsible for part of the residual deficit or surplus as per a

separate risk sharing agreement. The default in these cases is that any surplus would be retained

by the Fund in favour of the outsourcing employer/guarantor unless the commercial contract or

other arrangements dictate otherwise and the Fund is aware of this or representation is made by

the relevant parties in line with the Regulations (see below). For the avoidance of doubt, where the

outgoing employer is not responsible for any termination costs under a risk sharing agreement then

no exit credit will be paid as per the Regulations, provided that the guarantor makes the Fund

aware of the provisions of the risk sharing agreement in any representation made.

If there is any dispute, then the following arrangements will apply:

• In the case of a surplus, in line with the amending Regulations (The Local Government

Pension Scheme (Amendment) Regulations 2020) the parties will need to make

representations to the Administering Authority if they believe an Exit Credit should be

paid outside the policy set out above, or if they dispute the determination of the

Administering Authority. The Fund will notify the parties of the information required to

make the determination on request.

• If the Fund determines an Exit Credit is payable then they will pay this directly to the

exiting employer within 6 months of completion of the final cessation by the Actuary.

• In the case of a deficit, in order to maintain a consistent approach, the Fund will seek to

recover this from the exiting employer in the first instance although if this is not possible

then the deficit will be recovered from the guarantor either as a further contribution

collection or at the next valuation depending on the circumstances.




4 0

If requested, the Administering Authority will provide details of the information considered as part of

their determination. A determination notice will be provided alongside the termination assessment

from the Actuary. The notice will cover the following information and process steps:

1. Details of the employers involved in the process (e.g. the exiting employer and guarantor).

2. Details of the admission agreement, commercial contracts and any amendments to the terms

that have been made available to the Administering Authority and considered as part of the

decision making process. The underlying principle will be that if an employer is responsible

for a deficit, they will be eligible for any surplus. This is subject to the information provided

and any risk sharing arrangements in place.

3. The final termination certification of the exit credit by the Actuary.

4. The Administering Authority’s determination based on the information provided.

5. Details of the appeals process in the event that a party disagrees with the determination and

wishes to make representations to the Administering Authority.

In some instances, the outgoing employer may only be responsible for part of the residual deficit or

surplus as per the separate risk sharing agreement. The default is that any surplus would be

retained by the Fund in favour of the outsourcing employer/guarantor unless representation is

made by the relevant parties in line with the Regulations as noted above. For the avoidance of

doubt, where the outgoing employer is not responsible for any termination costs under a risk

sharing agreement then no exit credit will be paid as per the Regulations unless the Fund is aware

of the provisions of the risk sharing agreement in any representation made and determines an exit

credit should be paid.


judgment, however the final remedy is not currently known with any certainty although it is

expected to be similar to the allowance made in employer rates at this valuation. Where a surplus

or deficit is being subsumed, no allowance will be made for McCloud within the calculations.

However, if a representation is made to the Administering Authority then a reasonable estimate for

the potential cost of McCloud will need to be included. This will be calculated in line with the

treatment set out in this Funding Strategy Statement for all scheme members of the outgoing

employer. For the avoidance of doubt, there will be no recourse for an employer with regard to

McCloud, once the final termination has been settled and payments have been made. Once the

remedy is known, any calculations will be performed in line with the prevailing regulations and

guidance in force at the time.

The Administering Authority can vary the treatment on a case-by-case basis at its sole discretion if

circumstances warrant it based on the advice of the Actuary based on the representations from the

interested parties.

DESIGNATING BODIES

In the event of cessation, the designating body will be required to meet any outstanding liabilities

valued in line with the ”employers without a guarantor” approach outlined above. Upon exit, if

there is a shortfall, the assets and liabilities will revert to the Fund as a whole. This does not apply

to Connected and Controlled Entities for which the policy is set out below.

CONNECTED AND CONTRO LLED ENTIT I ES

In the event of cessation, these employers will be required to meet any outstanding liabilities

valued in line with the approach outlined above. In the event there is a shortfall, the assets and


4 1

liabilities will revert to the Fund as a whole (i.e. all current active employers). This applies unless a

Scheme employer provides a guarantee for their connected or controlled entity, in which case the

assets and liabilities will revert in totality to that scheme employer on termination, including any

unrecovered deficit, where appropriate.

PO LI CY I N RELATIO N TO THE FLEXIB IL I TY FOR EXI T DEBT PAYM ENTS

AND DEFERRED DEBT AG REEM ENTS ( DDA)

The default position for exit payments is that they are paid in full at the point of exit once the

cessation assessment has been completed by the Actuary (adjusted for interest where

appropriate). If an employer requests that an exit debt payment is recovered over a fixed period of

time or that they wish to enter into a Deferred Debt arrangement with the Fund, they must make a

request in writing covering the reasons for such a request. Any deviation from this default position

will be based on the Administering Authority’s assessment of whether the full exit debt is affordable

and whether it is in the interests of the Fund (and therefore ultimately taxpayers) to adopt either of

the approaches. In making this assessment the Administering Authority will consider the covenant

of the employer and also whether any security is required and available to back the arrangements.

Further details regarding covenant monitoring is set out within Appendix H.

Any costs (including necessary actuarial, legal and covenant advice) associated with assessing

this will be borne by the employer and, depending on the employer’s circumstances, will either be

required as an upfront payment or included in the contribution plan or exit debt payment.

The following policy and processes will be followed in line with the principles set out in the statutory

guidance published 2 March 2021.

PO LI CY FOR SPREADI NG EXI T PAYMENTS

The following process will determine whether an employer is eligible to spread their exit payment

over a defined period.

1. The Administering Authority will request financial information from the employer including

annual accounts, management accounts, budgets, cashflow forecasts and any other relevant

information to use as part of their covenant review. As part of this, the Administering Authority

will take advice from the Fund Actuary, covenant, legal and any other specialist adviser. If this

information is not provided then the default policy of immediate payment will be adopted.

2. Once this information has been provided, the Administering Authority (in conjunction with the

Fund Actuary, covenant and legal advisors where necessary) will review the covenant of the

employer to determine whether it is in the interests of the Fund to allow them to spread the exit

debt over a period of time. Depending on the length of the period and also the size of the

outstanding debt, the Fund may request security to support the payment plan before entering

into an agreement to spread the exit payments.

3. This could include non-uniform payments e.g. a lump sum up front followed by a series of

payments over the agreed period. The payments required will include allowance for interest on

late payment.


4 2

4. The initial process to determine whether an exit debt should be spread may take up to 3

months from receipt of data so it is important that employers who request to spread exit debt

payments notify the Fund in good time

5. If it is agreed that the exit payments can be spread then the Administering Authority will engage

with the employer regarding the following:

a. The spreading period that will be adopted (this will be subject to a maximum of 5 years

except in exceptional circumstances).

b. The initial and annual payments due and how these will change over the period

c. The interest rates applicable and the costs associated with the payment plan devised

d. The level of security required to support the payment plan (if any) and the form of that

security e.g. bond, escrow account etc.

e. The responsibilities of the employer during the exit spreading period including the

supply of updated information and events which would trigger a review of the situation

f. The views of the Actuary, covenant, legal and any other specialists necessary

g. The covenant information that will be required on a regular basis to allow the payment

plan to continue.

h. Under what circumstances the payment plan may be reviewed or immediate payment

requested (e.g. where there has been a significant change in covenant or

circumstances)

6. Once the Administering Authority has reached its decision, the arrangement will be

documented and any supporting agreements will be included.

7. Subject to the employer’s circumstances, any costs will either be required as an upfront

payment or included in the contribution plan.

EMPLOYERS PARTI CIPATI NG WITH NO CO NTRI BUTI NG M EMBERS

As opposed to paying the exit debt an employer may participate in the Fund with no contributing

members and utilise the “Deferred Debt Agreements” (DDA) at the sole discretion of the

Administering Authority. This would be at the request of the employer in writing to the

Administering Authority.

The following process will determine whether the Fund will agree to allow the employer to enter

into such an arrangement:

1. The Administering Authority will request updated covenant data from the employer including

annual accounts, management accounts, budgets, cashflow forecasts and any other relevant

information showing the expected financial progression of the organisation. If this information

is not provided then a DDA will not be entered into by the Administering Authority

2. Once this information has been provided, the Administering Authority will firstly consider

whether it would be in the best interests of the Fund and employers to enter into such an

arrangement with the employer. This decision will be based on a covenant review of the

employer to determine whether the exit debt that would be required if the arrangement was not

entered into is affordable at that time (based on advice from the Actuary, covenant and legal

advisor where necessary).


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3. The initial process to determine whether a Deferred Debt Agreement should apply may take up

to 3 months from receipt of the required information so an employer who wishes to request that

the Administering Authority enters into such an arrangement needs to make the request in

advance of the potential exit date (for example when the Employer’s active membership has

reduced below 5 members and it appears likely that termination could be triggered within the

next [6-9] months).

4. If the Administering Authority’s assessment confirms that the potential exit debt is not

affordable, the Administering Authority will engage in discussions with the employer about the

potential format of a Deferred Debt Agreement using the template Fund agreement which will

be based on the principles set out in the Scheme Advisory Board’s separate guide. As part of

this, the following will be considered and agreed:

• What security the employer can offer whilst the employer remains in the Fund. In

general the Administering Authority won’t enter into such an arrangement unless they

are confident that the employer can support the arrangement on an ongoing basis.

Provision of security may also result in a review of the recovery period and other

funding arrangements.

• The investment strategy that would be applied to the employer e.g. the lower risk

strategy or otherwise which could support the arrangement.

• Whether an upfront cash payment should be made to the Fund initially to reduce the

potential debt.

• What the updated secondary rate of contributions would be required up to the next

valuation.

• The financial information that will be required on a regular basis to allow the employer

to remain in the Fund and any other monitoring that will be required.

• The advice of the Actuary, covenant, legal and any other specialists necessary.

• The responsibilities that would apply to the employer while they remain in the Fund.

• What conditions would trigger the implementation of a revised deficit recovery plan and

subsequent revision to the secondary contributions (e.g. provision of security).

• The circumstances that would trigger a variation in the length of the deferred debt

agreement (if appropriate), including a cessation of the arrangement (e.g. where the

ability to pay contributions has weakened materially or is likely to weaken in the next 12

months). Where an agreement ceases an exit payment (or credit) could become

payable. Potential triggers may be the removal of any security or a significant change in

covenant assessed as part of the regular monitoring.

• Under what circumstances the employer may be able to vary the arrangement e.g. a

further cash payment.

The Administering Authority will then make a final decision on whether it is in the best interests

of the Fund to enter into a Deferred Debt Agreement with the employer and confirm the terms

that are required.

5. For employers that are successful in entering into a Deferred Debt Arrangement, contribution

requirements will continue to be reviewed as part of each actuarial valuation or in line with the

Deferred Debt Agreement in the interim if any of the triggers are met.


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6. The costs associated with the advice sought and drafting of the Deferred Debt Agreement will

be passed onto the employer as part of the arrangements and contribution requirements.

Subject to the employer’s circumstances, any costs will either be required as an upfront

payment or included in the contribution plan.


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APPENDIX D - REVIEW OF EMPLOYER CONTRIBUTIONS BETWEEN VALUATIONS

In line with the Regulations that came into force on 23rd September 2020, the Administering

Authority has the ability to review employer contributions between valuations. The Administering

Authority and employers now have the following flexibilities:

1. The Administering Authority may review the contributions of an employer where there

has been a significant change to the liabilities of an employer.

2. The Administering Authority may review the contributions of an employer where there

has been a significant change in the employer’s covenant.

3. An employer may request a review of contributions from the Administering Authority if

they feel that either point 1 or point 2 applies to them. The employer would be required

to pay the costs of any review following completion of the calculations and is only

permitted to make a maximum of two requests between actuarial valuation dates

(except in exceptional circumstances and at the sole discretion of the Administering

Authority).

Where the funding position for an employer significantly changes solely due to a change in

assets (and changes in actuarial assumptions), the Regulations do not allow employer

contributions to be reviewed outside of a full valuation although changes in assets would be

taken into account when considering if an employer can support its obligations to the Fund after

a significant covenant change (see 2. above).

The Administering Authority will consult with the employer prior to undertaking a review of their

contributions including setting out the reason for triggering the review.

For the avoidance of doubt any review of contributions may result in no change and a

continuation of contributions as per the latest actuarial valuation assessment. In the normal

course of events, a rate review would not be undertaken close to the next actuarial valuation

date, unless in exceptional circumstances. For example:

• A contribution review due to a change in membership profile would not be undertaken

in the 6 months leading up to the valuation Rates and Adjustments Certificate.

• However, where there has been a material change in covenant, a review will be

considered on a case by case basis which will determine if it should take place and

when any contribution change would be implemented.

SITUATIONS WHERE CONTRIBUTIONS MAY BE REVIEWED

Contributions may be reviewed if the Administering Authority becomes aware of any of the

following scenarios. Employers will be notified if this is the case.

Consideration will also be given to the impact that any employer changes may have on the other

employers and on the Fund as a whole, when deciding whether to proceed with a contribution

review.


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• Significant changes in the employer’s liabilities

This includes but is not limited to the following scenarios:

o Significant changes to the employer’s membership which will have a material impact on

their liabilities, such as:

i. Restructuring of an employer

ii. A significant outsourcing or transfer of staff to another employer (not necessarily

within the Fund)

iii. A bulk transfer into or out of the employer

iv. Other significant changes to the membership for example due to redundancies,

significant salary awards, ill health retirements (for employers not included in the

captive arrangement) or large number of withdrawals

o Two or more employers merging including insourcing and transferring of services

o The separation of an employer into two or more individual employers

In terms of assessing the triggers under 1. above, the Administering Authority will only

consider a review if the change in liabilities is expected to be more than 5% of the total

liabilities. In some cases this may mean there is also a change in the covenant of the

employer.

Any review of the rate will only take into account the impact of the change in liabilities

(including, if relevant, any underfunding in relation to pension strain costs) both in terms of

the Primary and Secondary rate of contributions.

• Significant changes in the employer’s covenant

This includes but is not limited to the following scenarios:

o Provision of, or removal of, or impairment of, security, bond, guarantee or some other

form of indemnity by an employer against their obligations in the Fund. For the

avoidance of doubt, this includes provision of security to any other pension

arrangement which may impair the security provided to the Fund.

o Material change in an employer’s immediate financial strength or longer-term financial

outlook (evidence should be available to justify this) including where an employer

ceases to operate or becomes insolvent.

o Where an employer exhibits behaviour that suggests a change in their ability and/or

willingness to pay contributions to the Fund.

In some instances, a change in the liabilities will also result in a change in an employer’s

ability to meet its obligations.

Whilst in most cases the regular covenant updates requested by the Administering Authority will

identify some of these changes, in some circumstances, employers will be required to agree to

notify the Administering Authority of any material changes. Where this applies, employers will

be notified separately and the Administering Authority will set out the requirements.

Additional information will be sought from the employer in order to determine whether a

contribution review is necessary. This may include annual accounts, budgets, forecasts and any

specific details of restructure plans. As part of this, the Administering Authority will take advice

from the Fund Actuary, covenant, legal and any other specialist adviser.

In this instance, any review of the contribution rate would include consideration of the updated

funding position (both on an ongoing and termination basis) and would usually allow for changes


4 7

in asset values when considering if the employer can meet its obligations on both an ongoing

and termination basis (if applicable). This could then lead to the following actions:

• The contributions changing or staying the same depending on the conclusion, and/or;

• Security to improve the covenant to the Fund, and/or;

• If appropriate, a change in the investment strategy via the lower risk investment option.

PROCESS AND POTENTIAL OUTCOMES OF A CONTRIBUTION REVIEW

Where one of the listed events occurs, the Administering Authority will enter into discussion with

the employer to clarify details of the event and the Administering Authority will notify the employer

of the intention to review contributions if a contribution review is deemed necessary. Ultimately,

the decision to review contributions as a result of the above events rests with the Administering

Authority after, if necessary, taking advice from their Actuary, legal or a covenant specialist

advisors.

This also applies where an employer requests a review of the contributions and the employer

will be required to agree to meet any professional and administration costs associated with the

review. The employer will be required to outline the rationale and case for the review through a

suitable exchange of information prior to consideration by the Administering Authority.

The Administering Authority will consider whether it is appropriate to use updated membership

data within the review (e.g. where the change in data is expected to have a material effect on

the employer’s liabilities in the Fund) and whether any supporting information is required from

the employer.

As well as revisiting the employer’s contribution plan, as part of the review it is possible that other

parts of the funding strategy will also be reviewed where the covenant of the employer has

changed, for example the Fund will consider:

• Whether the employer’s investment strategy remains appropriate or whether they should

move to an alternative strategy (e.g. the higher risk or lower risk) in line with this Funding

Strategy Statement.

• Whether the Primary contribution rate should be adjusted to allow for any profile change

and/or investment strategy change

• Whether the secondary contributions should be adjusted including whether the length of

the recovery period adopted at the previous valuation remains appropriate. The remaining

recovery period from the valuation would be the maximum period adopted (except in

exceptional and justifiable circumstances and at the sole discretion of the Administering

Authority on the advice of the Actuary).

The review of contributions may take up to 3 months from the date of confirmation to the

employer that the review is taking place, in order to collate the necessary data.

Any change to an employer’s contributions will be implemented at a date agreed between the

employer and the Fund. The Schedule to the Rates and Adjustment Certificate at the last

valuation will be updated for any contribution changes. As part of the process the Administering

Authority will consider whether it is appropriate to consult other Fund employers prior to

implementing the revised contributions. Circumstances where the Administering Authority may

consider it appropriate to do so include where there is another employer acting as guarantor in

the Fund, then the guarantor would be consulted on as part of the contribution review process.


4 8

The Administering Authority will agree a proportionate process for periodical ongoing monitoring

and review following the implementation of the revised contribution plan. The Employer will be

required to provide information to the Fund to support this, which will depend in part of the

reasons for triggering the contribution review.


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APPENDIX E - EMPLOYERS MOVING BETWEEN INVESTMENT STRATEGIES

The Fund currently operates two investment strategies for employers:

• The Higher Risk Investment Strategy – This is the current overall Fund investment

strategy, as set out in the Investment Strategy Statement and applies to the majority of

employers currently.

This is intended for employers that have a reasonable level of security (e.g. tax raising

employers and employers with a guarantee).

• The Lower Risk Investment Strategy – This strategy exhibits a lower investment risk

than the current whole fund strategy. It is predominately linked to corporate bond

assets and is expected to reduce funding volatility for employers within it. In addition,

the strategy has exposure to the Liability Driven Investment (“LDI”) portfolio to provide

protection against changes in market inflation expectations.

This is generally intended for employers that do not have any security, particularly those

with a weaker covenant or employers who are close to exiting the Fund. The Fund can

move an employer to this strategy if they deem it appropriate e.g. where there are

concerns around employer covenant. However, an employer can also request to switch

to this strategy subject to agreement with the Fund as discussed below.

Further information on these strategies and funding impact can be found within this Funding

Strategy Statement. The applicable investment strategy will be reflected in the relevant

employer’s notional asset share, funding basis and contribution requirements from the date they

are deemed to have switched to that strategy.

CHOOSING TO MOVE TO ANOTHER STRATEGY

Each employer’s current investment strategy will be shown on their valuation schedule. For new

employers, they will be placed in the higher risk investment strategy unless told otherwise.

Details of the assumptions used for each strategy are set out within this Funding Strategy

Statement.

If an employer would like to move to a different strategy (e.g. from the higher to the lower risk

strategy) then the following will apply:

• The employer must notify the Fund of their choice in writing

• The Fund will need to consider whether it is appropriate to allow the change in

strategy, considering all relevant factors

• The employer will be notified of any change in contributions that will apply following the


5 0

switch (e.g. a move to the lower risk strategy may lead to a significant increase in

future service and deficit contributions).

• Assuming that both the Fund and employer are happy to proceed, the switch will take place from the quarter end following notification to switch by the employer to the Fund,

(after the contribution changes have been confirmed). For example, if the decision is made on 1 February the switch will be made effective from 31 March. This is to allow the Fund to transition assets in a managed way as with any strategy change (subject to discretions below). Please note that the notification to switch must be provided at least

15 working days prior to the quarter end, otherwise the switch will be delayed to the next quarter end.

• The revised contributions will be payable from the start of the quarter from which the switch is made.

• Under normal circumstances, the employer will remain within that strategy for all future funding and contribution assessments (e.g. at each future actuarial valuation) whilst it continues to be an ongoing employer in the Fund with active members (further detail on

when a subsequent change may be appropriate is set out below).

Employers that are considering moving between strategies can ask the Fund for regular funding

updates if this would assist with any decision making.

OTHER CONSIDERATIONS

1. If an employer is deemed to have a relatively weaker covenant or poses a higher risk in

other areas, the Fund does reserve the right to automatically move the employer from the

higher risk to the lower risk strategy where it is felt that that the investment risk being taken

is too high irrespective of the timing considerations noted above (typically following

discussions with the employer).

This determination is based on:

o the type of employer and whether they have a guarantor in place;

o current funding position on both the ongoing and termination basis; and

o the strength of covenant and the ability to improve this over time.

This is to protect the Fund as a whole (ultimately the tax payers) and all employers within it.

2. Once an employer has moved into the lower risk strategy, they will be unable to move back

to the higher risk strategy unless they can provide sufficient security (e.g. a guarantee or

evidence of a change in employer type). Any move would be at the sole discretion of the

Fund.

3. There may be costs associated with a transition of assets into the lower risk strategy. The

Administering Authority reserves the right to pass these costs on to the employer usually

via a deduction in the notional asset share.


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IMPLEMENTING THE MOVE TO THE LOWER RISK STRATEGY

A further step will apply before any action is taken to avoid potential timing issues in switching

strategy. If there has been a material shift in market conditions between the date of notification

to switch by the employer and the following quarter end, the decision to move can be postponed:

o By the employer if they feel that market conditions have changed such that the

move would be more detrimental to their funding position than initially thought

at the time of notification

o By the Fund if the transition of assets would be too expensive based on the

current financial conditions

In this case, an agreement will be reached as to when it will be appropriate to move in the future

and triggers will be implemented to achieve this.


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APPENDIX F - ACADEMIES / MULTI-ACADEMY TRUST POLICY

ACADEM Y CONVERSIO NS AND DEFIC IT TRANSFERS

The Fund’s policy regarding the treatment of schools when converting to academy status is for the

new academy to inherit the school’s share of the historic local authority deficit prior to its

conversion. This is in accordance with the Department for Education (DfE) guidance issued when

the Academy conversion programme was extended to cover all schools.

Therefore, the transferring deficit is calculated as the capitalised amount of deficit funding

contributions (based on the local authority deficit recovery period) the school would have made to

the Fund had it not converted to academy status. This deficit amount is subject to a limit to ensure

that the minimum asset share of the new academy is nil.

M ULTI ACADEMY TRUSTS

Multi-Academy Trusts (MATS) are groups of academies managed and operated by one proprietor.

The employer of non-teaching staff in academies is the proprietor of the Academy Trust and not

the individual academy within the Trust. It is therefore the proprietor who is the employer for LGPS

purposes making the MAT legally responsible for staff across all schools in the pool.

Within a MAT all academies are governed by one Trust and a Board of Directors. The MAT holds

ultimate responsibility for all decisions regarding the running of the individual academies. However,

the governing bodies of the individual academies remain in place and the MAT will need to decide

the extent to which it delegates functions to these governing bodies to enable more focused local

control.

Multi-Academy Trusts are set up to cover a number of academies across England. The employees

of the former schools can be employed directly by the Trust so they can be deployed across

different academy schools in the Trust if necessary.

In cases where numerous academies are operated by the same managing Trust, the Fund is

willing to allow a combined funding position and average contribution requirements to apply to all

constituent academies. Notwithstanding this, the Fund will continue to track the constituent

academies separately, in the interests of transparency and clarity around entry and exit events.

APPROACH TO SETTI NG CO NTRIBUTION RATES

The Fund must have a separate employer number for each academy for transparency of

cashflows, managing risks should an academy need to leave one Trust for another and for FRS

reporting where disaggregated disclosure reports are required. It should also be noted that the

Department for Education (DfE) have confirmed that the guarantee relates to individual academies

and MATs.

The Fund will provide the MATs with the option of having a common Primary contribution rate for

all the academies within the trust if the MAT is willing to settle for that approach, bearing in mind

that the risks of under and over payments will be shared by all academies in the MAT pool.


5 3

The past service deficit will still be assessed at an individual academy level so that it only relates to

the staff of the respective academy. However, the MAT can opt to have the deficits for all the

academies within the trust aggregated for the purposes of the actuarial valuation report.

Any new academies joining an existing MAT pool in the Fund can contribute at the employer

contribution rate already established for the MAT but an actuarial assessment will still need to be

carried out to determine the deficit applicable to the transferring staff.

O UTSOURCING S BY MULTI ACADEMY TRU STS

The Fund’s current policy is in accordance with the Regulations requiring a separate admission

agreement in respect of separate contracts.

Under Schedule 2, Part 3, paragraph 5. of the 2013 Regulations, if the admission body is

exercising the functions of the Scheme employer in connection with more than one contract or

other arrangement under paragraph 1(d)(i), the administering authority and the admission body

shall enter into a separate admission agreement in respect of each contract or arrangement.

With the development of MATs, there is a case for the Fund to allow a MAT to enter into a single

admission agreement with the contractor providing similar services at various sites provided the

outsourcing is covered by a single commercial contract. The Fund has now developed a

mechanism whereby this can be done, subject to certain conditions which must be agreed by the

MAT.

The Fund will need to have sight of the contract in order to satisfy the regulatory requirement that

the Admission Agreement covers one contract. The Admission Agreement will need to have

provision for adding future employees should any academies join the MAT subsequent to the

commencement date.

The Scheme employer, the Multi Academy Trust in this instance, needs to be a party to any

admission agreement and, as such, is the ultimate guarantor. In the event of contractor failure, the

LGPS regulations provide that the outstanding liabilities assessed by the Fund’s actuary can be

called from the Scheme employer i.e. the Multi Academy Trust.

If academies are to comply with “new” Fair Deal guidance, employees carrying out a service on

behalf of the Academies must be allowed continued access to the LGPS. This can be achieved by

entering into an Admission Agreement with the Administering Authority, Multi Academy Trust and

the contractor (admitted body).

At every triennial valuation the actuary reviews the funding level of the admitted body and adjusts

its employer contribution rate as required. Once either the service contract comes to an end or all

the LGPS members have left, the admission agreement terminates and, in accordance with Fund

policy, the Trust becomes responsible for the assets and liabilities standing to the account of the

admitted body. A cessation valuation can be provided by the Fund actuary should the Trust

request it.


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APPENDIX G - RISK MANAGEMENT POLICY FOR NON-SCHEDULED BODIES

ADMI SSIO N BODI ES AS A RESULT OF O UTSO URCI NGS

The Regulations provide that bodies admitted to the Fund as a result of an outsourcing of services

(formerly transferee admission bodies) are guaranteed by the outsourcing Scheme employer.

Therefore, these employers pose less financial risk to the Fund.

The Fund’s policy is that the liabilities of such an admission body will in all cases revert to the

outsourcing Scheme employer when the agreement ceases.

The administering authority will discuss the appropriate deficit recovery period, where applicable,

for the admission body with the outsourcing Scheme employer. If the Scheme employer is

retaining the financial risk, the deficit recovery period applied can be the same as the Scheme

employer’s. Otherwise the deficit recovery period will be the length of the commercial contract left

to expiry (or the average remaining working lifetime of the membership if this is shorter).

ADMI SSIO N BODI ES PROVI DI NG A SERVI CE TO THE COMMUNITY

These admission bodies are a diverse group. Some are financially very secure to the extent that

they receive funding from either the government or local authorities on a quasi-permanent basis.

Others either have short-term funding contracts with local authorities, which may not be renewed

when they expire, or depend heavily on various forms of fund raising.

The Fund’s policy in recent years has been to require a guarantee from the Scheme employer

which has financial links with the bodies and for this reason they are treated in the same way as

those bodies admitted due to an outsourcing.

For historical reasons those which were admitted prior to 2004 have no guarantee and, as such,

constitute a potential risk to the Fund. This is because they may cease operations with insufficient

residual assets to meet their pension liabilities.

The risks associated with admitted bodies have always existed but these risks have assumed a

higher profile recently because most of these bodies have a deficit of assets relative to liabilities.

The tools available to manage these risks are limited to using a more prudent valuation basis (such

as the lower risk valuation basis) which minimises the deficit on exit; obtaining charges on assets

in favour of the Fund; setting up escrow accounts or obtaining other security. The approach to

agreeing the funding plans of these bodies will have regard to the financial strength of each

individual body. The aim will be to achieve a balance between securing the solvency of the Fund

and the sustainability of the organisation. For those with less secure income streams, the Fund will

consider how it can manage contributions into the Fund in the short to medium term without

compromising the financial stability of the organisation. Where there are assets or reserves, the

administering authority will explore how these contingent assets could be used to assist in funding

the liabilities or providing security to the Fund and its employing bodies.


5 5

Where there are no contingent assets the policy is to move over time to the lower risk funding

basis and to shorten the deficit recovery period. However, this will need to be weighed against the

ability of that body to pay higher contribution rates.

CONTRO LLED/CONNECTED ENTI T I ES

“Connected Entities” are employers that, in most cases, would have been “controlled entities”

under the previous regulations. Under the current regulations those entities which were controlled

by local authorities can only remain as Scheme employers if they become “connected or

controlled entities”. The Fund has been managing the transition with a view to ensuring that, where

bodies can no longer remain “controlled entities”, they satisfy the criteria under the current

regulations for becoming “connected entities”. In these cases the parent Scheme employer is not

obliged to provide a guarantee although with one exception the parent Scheme employers have

elected to do so in order to allow the entities to use the Higher Risk Valuation Funding Basis. In

the third case discussions are taking place with the interested parties to see how the situation can

best managed.


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APPENDIX H – COVENANT ASSESSMENT AND MONITORING POLICY

An employer’s covenant underpins its legal obligation and ability to meet its financial

responsibilities now and in the future. The strength of covenant depends upon the robustness of

the legal agreements in place and the likelihood that the employer can meet them. The covenant

effectively underwrites the risks to which the Fund is exposed, including underfunding, longevity,

investment and market forces.

An assessment of employer covenant focuses on determining the following:

> Type of body and its origins

> Nature and enforceability of legal agreements

> Whether there is a bond in place and the level of the bond

> Whether a more accelerated recovery plan should be enforced

> Whether there is an option to call in contingent assets

> Whether there is a need for monitoring of ongoing and termination funding ahead of the

next actuarial valuation

The strength of employer covenant can be subject to substantial variation over relatively short

periods of time and, as such, regular monitoring and assessment is vital.

R ISK CRI TERI A

The assessment criteria upon which an employer should be reviewed could include:

• Nature and prospects of the employer’s industry

• Employer’s competitive position and relative size

• Management ability and track record

• Financial policy of the employer

• Profitability, cashflow and financial flexibility

• Employer’s credit rating

• Position of the economy as a whole

Not all of the above would be applicable to assessing employer risk within the Fund; rather a

proportionate approach to consideration of the above criteria would be made, with further

consideration given to the following:

• The scale of obligations to the pension scheme relative to the size of the employer’s operating

cashflow

• The relative priority placed on the pension scheme compared to corporate finances

• An estimate of the amount which might be available to the scheme on insolvency of the

employer as well as the likelihood of that eventuality.


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ASSESSI NG EMPLOYER CO VENANT

The employer covenant will be assessed objectively and the ability of the employer to meet its

obligations will be viewed in the context of the Fund’s exposure to risk and volatility based on

publically available information and/or information provided by the employer. The monitoring of

covenant strength along with the funding position (including on the termination basis) enables the

Fund to anticipate and pre-empt employer funding issues and thus adopt a proactive approach. In

order to objectively monitor the strength of an employer’s covenant, adjacent to the risk posed to

the Fund, a number of fundamental financial metrics will be reviewed to develop an overview of the

employer’s stability and a rating score will be applied using a Red/Amber/Greed (RAG) rating

structure.

In order to accurately monitor employer covenant, it will be necessary for research to be carried out

into employers’ backgrounds and, in addition, for those employers to be contacted to gather as

much information as possible. Focus will be placed on the regular monitoring of employers with a

proactive rather than reactive view to mitigating risk.

The covenant assessment will be combined with the funding position to derive an overall risk

score. Action will be taken if these metrics meet certain triggers based on funding level, covenant

rating and the overall risk score

FREQUENCY OF MO NITORI NG

The funding position and contribution rate for each employer participating in the Fund will be

reviewed as a matter of course with each triennial actuarial valuation. However, it is important that

the relative financial strength of employers is reviewed regularly to allow for a thorough

assessment of the financial metrics. The funding position will be monitored (including on the

termination basis) using an online system provided to officers by the Fund Actuary.

Employers subject to a more detailed review, where a risk criterion is triggered, will be reviewed at

least every six months, but more realistically with a quarterly focus.

In some circumstances, employers will be required to agree to notify the Administering Authority

of any material changes in covenant. Where this applies, employers will be notified separately

and the Administering Authority will set out the requirements.

COVENANT RI SK M ANAGEM ENT

The focus of the Fund’s risk management is the identification and treatment of the risks and it will

be a continuous and evolving process which runs throughout the Fund’s strategy. Mechanisms

that will be explored with certain employers, as necessary, will include but are not limited to the

following:

1. Parental Guarantee and/or Indemnifying Bond

2. Transfer to a more prudent actuarial basis (e.g. the termination basis)

3. Shortened recovery periods and increased cash contributions

4. Managed exit strategies

5. Contingent assets and/or other security such as escrow accounts.


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APPENDIX I – INSURANCE ARRANGEMENTS

OVERVI EW OF ARRANG EMENT

For certain employers in the Fund, following discussions with the Fund Actuary and after

considering potential alternative insurance arrangements, a captive insurance arrangement was

established by the Administering Authority to cover ill-health retirement costs. This has applied to

all ill-health retirements since 1 April 2017.

The captive arrangement operates as follows:

• “Premiums” are paid by the eligible employers into the captive arrangement which is

tracked separately by the Fund Actuary in the valuation calculations. The premiums are

included in the employer’s primary rate. The premium for 2020/23 is 1.00% of pay per

annum

• The captive arrangement is then used to meet strain costs (over and above the premium

paid) emerging from ill-health retirements in respect of active members i.e. there is no

initial impact on the deficit position for employers within the captive and any subsequent

impact should be manageable.

• The premiums are set with the expectation that they will be sufficient to cover the costs in

the 3 years following the valuation date. If any excess premiums over costs are built up in

the Captive, these will be used to offset future adverse experience and/or result in lower

premiums at the discretion of the Administering Authority based on the advice of the

Actuary.

• In the event of poor experience over a valuation period any shortfall in the captive fund is

effectively underwritten by the other employers within the Fund. However, the future

premiums will be adjusted to recover any shortfall over a reasonable period with a view to

keeping premiums as stable as possible for employers. Over time the captive

arrangement should therefore be self-funding and smooth out fluctuations in the

contribution requirements for those employers in the captive arrangement.

• Premiums payable are subject to review from valuation to valuation depending on

experience and the expected ill health trends. They will also be adjusted for any changes

in the LGPS benefits. They will be included in employer rates at each valuation or on

commencement of participation for new employers.

EMPLOYERS COVERED BY THE ARRANG EMENT

Those employers (both existing and new) that will generally be included in the captive are:

• Academies

• Community related Admitted Bodies

• Contract related Admitted Bodies

• Town and Parish Councils

• Designating Bodies.


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These employers have been notified of their participation. New employers entering the Fund who

fall into the categories above will also be included. At the discretion of the Administering Authority

and where is it felt to be beneficial to the long term covenant and financial health of an employer,

specific employers (outside of the categories listed above) may be included within the captive

arrangement. In addition, the Administering Authority has the ability to exclude any employer in

order to manage employer risk within the Fund.

The Fund and the Actuary will monitor the number of retirements that each captive employer is

granting over time. If any employer has an unusually high incidence of ill health retirements,

consideration will be given to the governance around the eligibility criteria applied by the employer

and it is possible that some or all of the costs would fall on that employer if the governance was not

deemed strong enough.

For all other employers who do not form part of the captive arrangement, the current treatment of

ill-health retirements will still apply. The Fund therefore continues to monitor ill-health retirement

strain costs incurred in line with the allowance made in the actuarial assumptions. Once the

allowance is exceeded, any excess costs are recovered from the employer, either at the next

valuation or at an earlier review of the contributions due, including on termination of participation.


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APPENDIX J - GLOSSARY OF TERMS

ACTUARIAL VALUATION: an investigation by an actuary into the ability of the Fund to meet its

liabilities. For the LGPS the Fund Actuary will assess the funding level of each participating

employer and agree contribution rates with the administering authority to fund the cost of new

benefits and make good any existing deficits as set out in the separate Funding Strategy

Statement. The asset value is based on market values at the valuation date.

ADMINISTERING AUTHORITY: the council with a statutory responsibility for running the Fund and

that is responsible for all aspects of its management and operation.

ADMISSION BODIES: A specific type of employer under the Local Government Pension Scheme

(LGPS) who do not automatically qualify for participation in the Fund but are allowed to join if they

satisfy the relevant criteria set out in the Regulations.

BENCHMARK: a measure against which fund performance is to be judged.

BEST ESTIMATE ASSUMPTION: an assumption where the outcome has a 50/50 chance of being

achieved.

BONDS: loans made to an issuer (often a government or a company) which undertakes to repay

the loan at an agreed later date. The term refers generically to corporate bonds or government

bonds (gilts).

CAREER AVERAGE REVALUED EARNINGS SCHEME (CARE): with effect from 1 April 2014,

benefits accrued by members in the LGPS take the form of CARE benefits. Every year members

will accrue a pension benefit equivalent to 1/49th of their pensionable pay in that year. Each annual

pension accrued receives inflationary increases (in line with the annual change in the Consumer

Prices Index) over the period to retirement.

CPI: acronym standing for “Consumer Prices Index”. CPI is a measure of inflation with a basket of

goods that is assessed on an annual basis. The reference goods and services differ from those of

RPI and the method of calculation is different. The CPI is expected to provide lower, less volatile

inflation increases. Pension increases in the LGPS are linked to the annual change in CPI.

CPIH: An alternative measure of CPI which includes owner occupiers’ housing costs and Council

Tax (which are excluded from CPI).

CONTINGENT ASSETS: assets held by employers in the Fund that can be called upon by the

Fund in the event of the employer not being able to cover the debt due upon termination. The

terms will be set out in a separate agreement between the Fund and employer.

CORPORATE BOND EMPLOYER: an employer in the Fund, under previous Fund policies, whose

asset share is invested in corporate bond assets and for whom the discount rate used to assess

the liabilities is determined based on the market yields of high quality corporate bond investments

(usually at least AA rated) based on the appropriate duration of the liabilities being assessed.

These employers will now be moved onto the lower risk funding basis.


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COVENANT: the assessed financial strength of the employer. A strong covenant indicates a

greater ability (and willingness) to pay for pension obligations in the long run. A weaker covenant

means that it appears that the employer may have difficulties meeting its pension obligations in full

over the longer term or affordability constraints in the short term.

DEFERRED DEBT AGREEMENT (DDA): A written agreement between the Administering

Authority and an exiting Fund employer for that employer to defer their obligation to make an exit

payment and continue to make contributions at the assessed Secondary rate until the termination

of the DDA.

DEFERRED EMPLOYER: An employer that has entered into a DDA with the Fund.

DEFICIT: the extent to which the value of the Fund’s past service liabilities exceeds the value of

the Fund’s assets. This relates to assets and liabilities built up to date and ignores the future build-

up of pension (which in effect is assumed to be met by future contributions).

DEFICIT RECOVERY PERIOD: the target length of time over which the current deficit is intended

to be paid off. A shorter period will give rise to a higher annual contribution, and vice versa.

DISCOUNT RATE: the rate of interest used to convert a cash amount e.g. future benefit payments

occurring in the future to a present value i.e. the liabilities. A higher discount rate means lower

liabilities and vice versa.

EMPLOYER'S FUTURE SERVICE CONTRIBUTION RATE (“PRIMARY RATE”): the contribution

rate payable by an employer (expressed as a % of pensionable pay) which is set at a level which

should be sufficient to meet the cost of new benefits being accrued by active members in the

future. The cost will be net of employee contributions and will include an allowance for the

expected level of administrative expenses.

EMPLOYING BODIES: Scheme employers that participate in the LGPS

EQUITIES: shares in a company which are bought and sold on a stock exchange.

EQUITY PROTECTION: an insurance contract which provides protection against falls in equity

markets. Depending on the pricing structure, this may be financed by giving up some of the upside

potential in equity market gains.

EXIT CREDIT: the amount payable from the Fund to an exiting employer where the exiting

employer is determined to be in surplus at the point of cessation based on a termination

assessment by the Fund Actuary.

FUNDING OR SOLVENCY LEVEL: the ratio of the value of the Fund’s assets and the value of the

Fund’s liabilities expressed as a percentage.

FUNDING STRATEGY STATEMENT: This is a key governance document which the Administering

Authority is obliged to prepare and publish that outlines how the administering authority will

manage employer’s contributions and risks to the Fund.

GOVERNMENT ACTUARY'S DEPARTMENT (GAD): the GAD is responsible for providing

actuarial advice to public sector clients. GAD is a non-ministerial department of HM Treasury.


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GUARANTEE / GUARANTOR: a formal promise by a third party (the guarantor) that it will meet

any pension obligations not met by a specified employer. The presence of a guarantor will mean,

for instance, that the Fund can consider the employer’s covenant to be as strong as its guarantor’s

GUARANTEE OF LAST RESORT: for the purposes of the FSS, a guarantee of last resort refers to

the situation where an employer has exhausted all alternative options for payment of an exit debt

and so the debt is recovered from another employer in the Fund, however the liabilities are not

subsumed in this case.

HIGHER RISK VALUATION FUNDING BASIS: the financial and demographic assumptions used

to determine the employer’s contribution requirements. The relevant discount rate used for valuing

the present value of liabilities is determined based on the expected long term return achieved on

the Fund’s investments. This is expressed as an expected return over CPI.

ILL HEALTH CAPTIVE: this is a notional fund designed to protect certain employers against

excessive ill health costs in return for an agreed insurance premium.

INVESTMENT STRATEGY: the long-term distribution of assets among various asset classes that

takes into account the Funds objectives and attitude to risk.

LETTING EMPLOYER: an employer that outsources part of its services/workforce to another

employer, usually a contractor. The contractor will pay towards the LGPS benefits accrued by the

transferring members, but ultimately the obligation to pay for these benefits will revert to the letting

employer.

LGPS: the Local Government Pension Scheme, a public sector pension arrangement put in place

via Government Regulations, for workers in local government. These Regulations also dictate

those employing bodies which are eligible to participate, members’ contribution rates, benefit

calculations and certain governance requirements.

LIABILITIES: the actuarially calculated present value of all benefit entitlements i.e. scheme

cashflows of all members of the Fund, accumulated to date or in the future. The liabilities in relation

to the benefit entitlements earned up to the valuation date are compared with the present market

value of Fund assets to derive the deficit and funding/solvency level. Liabilities can be assessed on

different set of actuarial assumptions depending on the purpose of the valuation.

LOWER RISK FUNDING BASIS: an approach where the discount rate used to assess the liabilities

is determined based on the expected long term return achieved on the Fund’s lower risk

investment strategy. This is usually adopted for employers who are deemed to have a weaker

covenant than others in the Fund, are planning to exit the Fund or would like to target a lower risk

strategy. This basis is adopted for ongoing contribution rate purposes as the employers’ asset

share is invested in the lower risk investment strategy.

LOWER RISK INVESTMENT STRATEGY: an investment strategy which is predominately linked to

corporate bond investment assets and is expected to reduce funding volatility for employers within

it (as a minimum this will be reviewed following each actuarial valuation). In addition, the strategy

has exposure to the Liability Driven Investment (“LDI”) portfolio to provide protection against

changes in market inflation expectations.


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MANDATORY SCHEME EMPLOYERS: employers that have the statutory right to participate in the

LGPS. These organisations (set out in Part 1 of Schedule 2 of the 2013 Regulations) would not

need to designate eligibility, unlike the Part 2 Scheme Employers. For example, these include

councils, colleges, universities and academies.

MATURITY: a general term to describe a Fund (or an employer’s position within a Fund) where the

members are closer to retirement (or more of them already retired) and the investment time

horizon is shorter. This has implications for investment strategy and, consequently, funding

strategy.

MCCLOUD JUDGMENT: This refers to the linked legal cases of Sargeant and McCloud, and

which found that the transitional protections (which were afforded to older members when the public

service pension schemes were reformed in 2014/15) constituted unlawful age discrimination.

MEMBERS: The individuals who have built up (and may still be building up) entitlement in the

Fund. They are divided into actives (current employee members), deferreds (ex-employees who

have not yet retired) and pensioners (ex-employees who have now retired and dependants of

deceased ex-employees).

MINIMUM RISK FUNDING BASIS: an approach where the discount rate used to assess the

liabilities is determined based on the market yields of Government bond investments based on the

appropriate duration of the liabilities being assessed. This can be used as a benchmark to assess

the level of reliance on future investment returns in the funding strategy and therefore the level of

risk appetite in a Funds choice of investment strategy.

ORPHAN LIABILITIES: liabilities in the Fund for which there is no sponsoring employer within the

Fund. Ultimately orphan liabilities must be underwritten by all other employers in the Fund.

PERCENTILES: relative ranking (in hundredths) of a particular range. For example, in terms of

expected returns a percentile ranking of 75 indicates that in 25% of cases, the return achieved

would be greater than the figure, and in 75% cases the return would be lower.

PHASING/STEPPING OF CONTRIBUTIONS: when there is an increase/decrease in an

employer’s long term contribution requirements, the increase in contributions can be gradually

“stepped” or phased in over an agreed period. The phasing/stepping can be in equal steps or on a

bespoke basis for each employer.

POOLING: employers may be grouped together for the purpose of calculating contribution rates,

(i.e. a single contribution rate applicable to all employers in the pool). A pool may still require each

individual employer to ultimately pay for its own share of deficit, or (if formally agreed) it may allow

deficits to be passed from one employer to another.

PREPAYMENT: the payment by employers of contributions to the Fund earlier than that certified

by the Actuary. The amount paid will be reduced in monetary terms compared to the certified

amount to reflect the early payment.

PRESENT VALUE: the value of projected benefit payments, discounted back to the valuation date.

PRIMARY RATE OF THE EMPLOYERS’ CONTRIBUTION: the contribution rate required to meet

the cost of the future accrual of benefits including ancillary, death in service and ill health benefits


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together with administration costs. It is expressed as a percentage of pensionable pay, ignoring

any past service surplus or deficit, but allowing for any employer-specific circumstances, such as

its membership profile, the funding strategy adopted for that employer, the actuarial method used

and/or the employer’s covenant. The Primary rate for the whole fund is the weighted average (by

payroll) of the individual employers’ Primary rates.

PROFILE: the profile of an employer’s membership or liability reflects various measurements of

that employer’s members, i.e. current and former employees. This includes: the proportions which

are active, deferred or pensioner; the average ages of each category; the varying salary or pension

levels; the lengths of service of active members compared to their salary levels, etc.

PRUDENT ASSUMPTION: an assumption where the outcome has a greater than 50/50 chance of

being achieved i.e. the outcome is more likely to be overstated than understated. Legislation and

Guidance requires the assumptions adopted for an actuarial valuation to be sufficiently prudent.

RATES AND ADJUSTMENTS CERTIFICATE: a formal document required by the LGPS

Regulations, which must be updated at least every three years at the conclusion of the formal

valuation. This is completed by the actuary and confirms the contributions to be paid by each

employer (or pool of employers) in the Fund for the three-year period until the next valuation is

completed.

REAL RETURN OR REAL DISCOUNT RATE: a rate of return or discount rate net of (CPI)

inflation.

RECOVERY PLAN: a strategy by which an employer will make up a funding deficit over a specified

period of time (“the recovery period”), as set out in the Funding Strategy Statement.

SAB FUNDING BASIS OR SAB BASIS: a set of actuarial assumptions determined by the LGPS

Scheme Advisory Board (SAB). Its purposes are to set out the funding position on a standardised

approach so that comparisons can be made with other LGPS Funds, and to assist with the “Section

13 review” as carried out by the Government Actuary’s Department. As an example, the real

discount rate over and above CPI used in the SAB Basis as at 31 March 2019 was 2.4% p.a., so it

can be substantially different from the actuarial assumptions used to calculated the Fund’s solvency

funding position and contribution outcomes for employers.

SCHEME EMPLOYERS: organisations that participate in the Avon Pension Fund

SECTION 13 VALUATION: in accordance with Section 13 of the Public Service Pensions Act

2014, the Government Actuary’s Department (GAD) have been commissioned to advise the

Department for Communities and Local Government (DCLG) in connection with reviewing the 2019

LGPS actuarial valuations. All LGPS Funds therefore will be assessed on a standardised set of

assumptions as part of this process.

SECONDARY RATE OF THE EMPLOYERS’ CONTRIBUTION: an adjustment to the Primary rate

to reflect any past service deficit or surplus, to arrive at the rate each employer is required to pay.

The Secondary rate may be expressed as a percentage adjustment to the Primary rate, and/or a

cash adjustment in each of the three years beginning 1 April in the year following that in which the

valuation date falls. The Secondary rate is specified in the rates and adjustments certificate. For

any employer, the rate they are actually required to pay is the sum of the Primary and Secondary

rates. Secondary rates for the whole fund in each of the three years shall also be disclosed.


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These will be calculated as the weighted average based on the whole fund payroll in respect of

percentage rates and as a total amount in respect of cash adjustments.

SOLVENCY FUNDING TARGET: an assessment of the present value of benefits to be paid in the

future. The desired funding target is to achieve a solvency level of a 100% i.e. assets equal to the

accrued liabilities at the valuation date assessed on the ongoing concern basis.

STRAIN COSTS: the costs arising when a members retire before their normal retirement date and

receive their pensions immediately without actuarial reduction. So far as the Fund is concerned,

where the retirements are not caused by ill-health, these costs are invoiced directly to the retiring

member’s employer at the retirement date and treated by the Fund as additional contributions. The

costs are calculated by the Actuary.

SWAPS: a generic term for contracts put in place with financial institutions such as banks to limit

the Fund’s investment and other financial risks.

50/50 SCHEME: in the LGPS, active members are given the option of accruing a lower personal

benefit in the 50/50 Scheme, in return for paying a lower level of contribution.

AVON PENSION FUND

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